Chapter 2 Vocabulary

Question 1

Classified balance sheet

Answer 1

A balance sheet that groups together similar assets and similar liabilities, using a number of standard classifications and sections.

Question 2

Comparability

Answer 2

Ability to compare the accounting information of different companies because they use the same accounting principles.

Question 3

Consistency

Answer 3

Use of the same accounting principles and methods from year to year within a company.

Question 4

Cost constraint

Answer 4

Constraint that weighs the cost that companies will incur to provide the information against the benefit that financial statement users will gain from having the information available.

Question 5

Current assets

Answer 5

Assets that companies expect to convert to cash or use up within one year or the operating cycle, whichever is longer.

Question 6

Current liabilities

Answer 6

Obligations that a company expects to pay within the next year or operating cycle, whichever is longer.

Question 7

Debt to assets ratio

Answer 7

A measure of solvency calculated as total liabilities divided by total assets. It measures the percentage of total financing provided by creditors.

Question 8

Earnings per share (EPS)

Answer 8

A measure of the net income earned on each share of common stock; computed as net income minus preferred dividends divided by the weighted-average number of common shares outstanding during the year.

Question 9

Economic entity assumption

Answer 9

An assumption that every economic entity can be separately identified and accounted for.

Question 10

Fair value principle

Answer 10

Assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability).

Question 11

Faithful representation

Answer 11

Information that is complete, neutral, and free from error.

Question 12

Financial Accounting Standards Board (FASB)

Answer 12

The primary accounting standard-setting body in the United States.

Question 13

Free cash flow

Answer 13

Net cash provided by operating activities after adjusting for capital expenditures and cash dividends paid.

Question 14

Full disclosure principle

Answer 14

Accounting principle that dictates that companies disclose circumstances and events that make a difference to financial statement users.

Question 15

Generally accepted accounting principles (GAAP)

Answer 15

A set of accounting standards that have substantial authoritative support and which guide accounting professionals.

Question 16

Going concern assumption

Answer 16

The assumption that the company will continue in operation for the foreseeable future.

Question 17

Historical cost principle

Answer 17

An accounting principle that states that companies should record assets at their cost.

Question 18

Intangible assets

Answer 18

Assets that do not have physical substance.

Question 19

International Accounting Standards Board (IASB)

Answer 19

An accounting standard-setting body that issues standards adopted by many countries outside of the United States.

Question 20

International Financial Reporting Standards (IFRS)

Answer 20

Accounting standards, issued by the IASB, that have been adopted by many countries outside of the United States.

Question 21

Current ratio

Answer 21

A measure of liquidity computed as current assets divided by current liabilities.

Question 22

Liquidity

Answer 22

The ability of a company to pay obligations that are expected to become due within the next year or operating cycle.

Question 23

Liquidity ratios

Answer 23

Measures of the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.

Question 24

Long-term investments

Answer 24

Generally, (1) investments in stocks and bonds of other corporations that companies hold for more than one year; (2) long-term assets, such as land and buildings, not currently being used in the company’s operations; and (3) long-term notes receivable.

Question 25

Long-term liabilities (long-term debt)

Answer 25

Obligations that a company expects to pay after one year.

Question 26

Materiality

Answer 26

Whether an item is large enough to likely influence the decision of an investor or creditor.

Question 27

Monetary unit assumption

Answer 27

An assumption that requires that only those things that can be expressed in money are included in the accounting records.

Question 28

Operating cycle

Answer 28

The average time required to purchase inventory, sell it on account, and then collect cash from customers—that is, go from cash to cash.

Question 29

Periodicity assumption

Answer 29

An assumption that the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared for the business.

Question 30

Profitability ratios

Answer 30

Measures of the operating success of a company for a given period of time.

Question 31

Property, plant, and equipment

Answer 31

Assets with relatively long useful lives that are currently used in operating the business.

Question 32

Public Company Accounting Oversight Board (PCAOB)

Answer 32

The group charged with determining auditing standards and reviewing the performance of auditing firms.

Question 33

Ratio

Answer 33

An expression of the mathematical relationship between one quantity and another.

Question 34

Ratio analysis

Answer 34

A technique that expresses the relationship among selected items of financial statement data.

Question 35

Relevance

Answer 35

The quality of information that indicates the information makes a difference in a decision.

Question 36

Securities and Exchange Commission (SEC)

Answer 36

The agency of the U.S. government that oversees U.S. financial markets and accounting standard-setting bodies.

Question 37

Solvency

Answer 37

The ability of a company to pay interest as it comes due and to repay the balance of debt due at its maturity.

Question 38

Solvency ratios

Answer 38

Measures of the ability of the company to survive over a long period of time.

Question 39

Timely

Answer 39

Information that is available to decision-makers before it loses its capacity to influence decisions.

Question 40

Understandability

Answer 40

Information presented in a clear and concise fashion so that users can interpret it and comprehend its meaning.

Question 41

Verifiable

Answer 41

The quality of information that occurs when independent observers, using the same methods, obtain similar results.

Question 42

Working capital

Answer 42

The difference between the amounts of current assets and current liabilities.