Chapter 2 Key Terms

Question 1

account

Answer 1

A record in which transactions affecting individual assets, liabilities, stockholders’ equity, revenues and expenses are recorded

Question 2

accounting equation

Answer 2

Assets = Liabilities + Stockholders’ Equity (A=L+SE)

The fundamental relationship represented by the balance sheet and the foundation of the bookkeeping process.

Question 3

accounts payable

Answer 3

A liability representing an amount payable to another entity, usually because of the purchase of merchandise or services on credit.

Question 4

accounts receivable

Answer 4

An asset representing a claim against another entity, usually arising from selling goods or services on credit.

Question 5

accrual accounting

Answer 5

Accounting that recognizes revenues and expenses as they occur, even though the cash receipt from the revenue or the cash disbursement related to the expense may occur before or after the event that causes revenue or expense recognition.

Question 6

accrued liabilities

Answer 6

Amounts that are owed by an entity on the balance sheet date.

Question 7

accumulated depreciation

Answer 7

The sum of the depreciation expense that has been recognized over time. Accumulated depreciation is a contra asset–an amount that is subtracted from the cost of the related asset on the balance sheet.

Question 8

additional paid-in capital

Answer 8

The excess of the amount received from the sale of stock over the par value of the shares sold.

Question 9

assets

Answer 9

Probable future economic benefits obtained or controlled by an entity as a result of past transactions or events.

Question 10

balance sheet

Answer 10

The financial statement that is a listing of the entity’s assets, liabilities, and stockholders’ equity at a point of time. Sometimes this statement is called the statement of financial position.

Question 11

balance sheet equation

Answer 11

Another term for accounting equation

Question 12

cash

Answer 12

An asset on the balance sheet that represents the amount of cash on hand and balances in bank accounts maintained by the entity.

Question 13

common stock

Answer 13

The class of stock that represents residual ownership of the corporation.

Question 14

corporation

Answer 14

A form of organization in which ownership is evidenced by shares of stock owned by stockholders; its features, such as limited liability of the stockholders, make this the principal form of organization for most business activity.

Question 15

cost of goods sold

Answer 15

Cost of merchandise sold during the period; an expense deducted from net sales to arrive at gross profit. Frequently used synonyms are cost of sales and cost of products sold.

Question 16

current assets

Answer 16

Cash and those assets that are likely to be converted to cash or used to benefit the entity within one year of the balance sheet date.

Question 17

current liabilities

Answer 17

Those liabilities due to be paid within one year of the balance sheet date.

Question 18

depreciation

Answer 18

The accounting process of recognizing the cost of an asset that is used up over its useful life to the entity.

Question 19

depreciation expense

Answer 19

The expense recognized in a fiscal period for the depreciation of an asset.

Question 20

dividend

Answer 20

A distribution of earnings to the stockholders of a corporation.

Question 21

earnings per share of common stock outstanding

Answer 21

Net income available to the common stockholders divided by the average number of shares of common stock outstanding during the period. Usually referred to simply as EPS.

Question 22

equity

Answer 22

The ownership right associated with an asset. See stockholders equity.

Question 23

expenses

Answer 23

Outflows or other using up of assets or incurring a liability during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s major operations.

Question 24

fiscal year

Answer 24

The annual period used for reporting to owners.

Question 25

gains

Answer 25

Increases in net assets from incidental transactions that are not revenues or investments by owners.

Question 26

going concern concept

Answer 26

A presumption that the entity will continue in existence for the indefinite future.

Question 27

gross profit

Answer 27

Net sales less cost of goods sold. Sometimes called gross margin.

Question 28

income from operations

Answer 28

The difference between gross profit and operating expenses. Also referred to as operating income.

Question 29

income statement

Answer 29

The financial statement that summarizes the entity's revenues, expenses, gains, and losses for a period of time and thereby reports the entity's results of operations for that period of time.

Question 30

liabilities

Answer 30

Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.

Question 31

losses

Answer 31

Decreases in net assets from incidental transactions that are not expenses or distributions to owners.

Question 32

matching concept

Answer 32

The concept that expenses incurred in generating revenues should be deducted from revenues earned during the period for which results are being reported.

Question 33

merchandise inventory

Answer 33

Items held by an entity for sale to customers in the normal course of business.

Question 34

net assets

Answer 34

The difference between assets and liabilities; also referred to as stockholders' equity or owners' equity.

Question 35

net income

Answer 35

The excess of revenues and gains over expenses and losses for a fiscal period.

Question 36

net sales

Answer 36

Gross sales, less sales discounts and sales returns and allowances.

Question 37

net worth

Answer 37

Another term for net assets or stockholders' equity or owners' equity, but not as appropriate because the term worth may be misleading.

Question 38

opportunity cost

Answer 38

An economic concept relating to income forgone because an opportunity to earn income was not pursued.

Question 39

owners' equity

Answer 39

Another term for stockholders' equity. The owners' claim in the assets of the entity. Sometimes called net assets; the difference between assets and liabilities.

Question 40

paid-in capital

Answer 40

The amount invested in the entity by the stockholders.

Question 41

par value

Answer 41

An arbitrary value assigned to a share of stock when the corporation is organized. Sometimes used to refer to the stated value or face amount of a security.

Question 42

partnership

Answer 42

A form of organization indicating ownership by two or more individuals or corporations without the limited liability and other features of a corporation.

Question 43

profit

Answer 43

The excess of revenues and gains over expenses and losses for a fiscal period; another term for net income.

Question 44

profit and loss statement

Answer 44

Another term for income statement.

Question 45

proprietorship

Answer 45

A form of organization indicating individual ownership without the limited liability and other features of a corporation.

Question 46

retained earnings

Answer 46

Cumulative net income that has not been distributed to the stockholders of a corporation as dividends.

Question 47

revenues

Answer 47

Inflows of cash or increases in other assets, or the settlement of liabilities during a period, from delivering or producing goods, rendering services, or performing other activities that constitute the entity's major operations.

Question 48

statement of cash flows

Answer 48

The financial statement that explains why cash changed during a fiscal period. Cash flows from operating, investing, and financing activities are shown.

Question 49

statement of changes in capital stock

Answer 49

The financial statement that summarizes changes during a fiscal period in capital stock and additional paid-in capital. This information may be included in the statement of changes in stockholders' equity.

Question 50

statement of changes in retained earnings

Answer 50

The financial statement that summarizes the changes during a fiscal period in retained earnings. This information may be included in the statement of changes in stockholders' equity.

Question 51

statement of changes in stockholders' equity

Answer 51

The financial statement that summarizes the changes during a fiscal period in capital stock, additional paid-in capital, retained earnings, and other elements of stockholders' equity.

Question 52

statement of earnings

Answer 52

Another term for income statement; it shows the revenues, expenses, gains, and losses for a period of time and thereby the entity's results of operations for that period of time.

Question 53

statement of equity

Answer 53

Another term for statement of changes in stockholders' equity; a description used for this financial statement primarily by large, publicly-traded companies, which are required to report changes in the equity of both the controlling (parent company) interests and noncontrolling (minority) interests.

Question 54

statement of financial position

Answer 54

Another term for balance sheet; a listing of the entity's assets, liabilities, and stockholders' equity at a point in time.

Question 55

statement of operations

Answer 55

Another term for income statement.

Question 56

statement of stockholders' equity

Answer 56

Another term for statement of changes in stockholders' equity.

Question 57

stock

Answer 57

The evidence of ownership of a corporation.

Question 58

stockholders

Answer 58

The owners of a corporation's stock; sometimes called shareholders.

Question 59

stockholders' equity

Answer 59

The stockholders' claim in the assets of the entity. Sometimes called owners' equity or net assets; the difference between assets and liabilities.

Question 60

subsidiary

Answer 60

A corporation whose stock is more than 50 percent owned by another corporation.

Question 61

transactions

Answer 61

Economic interchanges between entities that are accounted for and reflected in financial statements.