Exam 2 Flashcards by Sabrina Belisle

a loan with scheduled periodic payments of both principal and interest. Payments are
applied first towards reducing the interest balance, and any remaining sum towards the principal
balance.

amortzied loan

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an annuity whose payments are made at the beginning of each period. An annuity due is
less common than an ordinary annuity.

annuity due

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an annuity whose payments grow at a constant rate per period for the length of the
contract.

growing annuity

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a breakdown of the interest and principal payments on an amortized loan.

loan amortization schedule

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an annuity whose payments are made at the end of each period. Most annuities
come in the form of an ordinary annuity.
trial and error refers to solving for the inter

ordinary annuity

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refers to solving for the internal rate of return (IRR). Various discount rates are plugged
into the equation to find the correct discount rate that sets the net present value (NPV) to zero.

trial and error

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an infinite stream of cash flows that are paid or received with a regular frequency. In general,
the word perpetuity is used to refer to a stream where all the cash flows are the same. This kind of stream
is also called a level or constant perpetuity.

perpetuity

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a type of perpetuity where the regularly occurring cash flows grow at fixed rate per
period forever. Every cash flow in the stream is different from every other, but they are related through
the constant growth rate.

growing perpetuity

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a report issued to a company’s shareholders, creditors, and regulatory organizations following the end of its fiscal year that summarizes the financial performance of the company

annual report

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resources owned by a company

assets

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a financial statement that reports the assets, liabilities, and stockholders’ equity of a business as of a specific point in time. The balance sheet reports the cumulative financial impact of the business over the many years it has operated.

balance sheet

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basic accounting equation

Assets = Liabilities + Stockholders’ Equity

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accountants that obtain a professional qualification and are licensed to perform audits

certified public accountant (CPA)

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the term used to describe the total amount invested by stockholders for the shares they purchase in the business

common stock

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the type of accounting used by company management to run ongoing operations. A cost accounting system is company specific and focuses on internal users of financial information. It does not have to conform with GAAP, and in many cases a company’s own accounting system is different from GAAP.

cost or management accounting

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persons or entities that provide financing to businesses or organizations

creditors

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payments of cash from a corporation to its shareholders. Most dividends are cash distributions but could come in the form of stock or property

dividends

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expanded accounting equation

Assets = Liabilities + Stockholders’ Equity
Common Stock + Retained Earnings
Net Income - Dividends Revenues - Expenses

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costs incurred in a business’s efforts to generate revenue

expenses

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individuals or entities that are not directly involved with running the business. External users include investors, creditors, taxing authorities, customers, labor unions, and regulatory agencies

external users

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the primary accounting standard-setting body in the U.S.

Financial Accounting Standards Board (FASB)

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the type of accounting concerned with the preparation of financial statements for external users. It must conform with GAAP.

financial accounting

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refers to the actions a company takes to raise funds to finance its long-term investments either by issuing stock or debt

financing activities

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a common set of accounting rules, standards, and practices defined by standard-setting bodies that public companies must use to compile and report their financial statements

Generally Accepted Accounting Principles (GAAP)

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a basic accounting assumption that a company or other entity will be able to continue operating for a period of time that is sufficient to carry out its objectives and obligations

going concern

a financial statement that reports the revenues and expenses and the resulting net income or loss of a company for a specific financial reporting period

income statement

managers who plan, organize, and run a business

internal users

refers to the purchase of the long-term assets a company needs in order to operate

investing activities

a company’s legal debts or obligations owed to creditors that arise during the course of business operations

liabilities

a section of a company’s annual report in which management explains how the company performed the past year and its outlook for the coming year

management discussion and analysis (MD&A

revenues less expenses

net income

results when expenses exceed revenues

net loss

supplemental information added to the end of the financial statements to clarify and expand upon information presented in the financial statements

notes to the financial statements

pertains to a company’s core business activities, such as manufacturing, distributing, marketing and selling a product or service

operating activities

the portion of net income retained by the corporation rather than distributed to shareholders as dividends.

retained earnings

reports the changes in retained earnings for a specific financial reporting period.

retained earnings statement

the increase in assets that result from the sale of goods or services during the normal course of business

revenue

an act passed by congress in 2002 to protect investors from the possibility of fraudulent accounting activities by corporations

Sarbanes-Oxley Act (SOX)

a financial statement that reports on the cash inflows and cash outflows of a business for a specific financial reporting period

statement of cash flows

the portion of the balance sheet that represents the owners’ claim to the residual interest in the business

stockholders’ equity

the type of accounting that focuses on tax issues faced by corporations. Tax accounting is governed by the Internal Revenue Code, not GAAP.

tax accounting

when cash follows the economic activity

accrual

a key assumption in financial reporting: transactions that change a company’s financial statements are recorded in the periods in which the events occur, not when the benefits/cost are received/paid

accrual basis accounting assumption

companies record revenue only when cash is received; companies record expenses only when cash is paid. Cash basis accounting is prohibited under GAAP

cash basis accounting

a balance sheet that groups together similar assets and similar liabilities

classified balance sheet

an enhancing quality of useful information: comparability results when different companies use the same accounting principles

comparability

the constraint of determining whether the costs incurred to provide the financial information outweigh the benefit that financial statement users will gain from having the information available

cost constraint

companies record assets at their cost

cost principle or historical cost principle

assets that a company expects to convert to cash or use up within one year or its operating cycle, whichever is longer

current assets

obligations that a company expects to pay within one year or the operating cycle, whichever is longer

current liabilities

when cash precedes the economic activity

deferral

practice of allocating the cost of assets to a number of years

depreciation

every economic entity can be separately identified and accounted for – company transactions should not be blurred with personal transactions or transactions with other companies

economic entity assumption

expenses are recorded in the period in which they are incurred, regardless of when they are actually paid. Expenses are matched with revenues in the period when efforts are expended to generate revenues.

expense recognition principle or matching principle

assets and liabilities are reported at fair value

fair value principle

a fundamental quality of useful information: faithful representation means that accounting information accurately depicts what really happened

faithful representation

the primary accounting standard-setting body in the U.S.

Financial Accounting Standards Board (FASB)

companies disclose all circumstances and events that would make a difference to financial statement users

full disclosure principle

the set of accounting rules and practices in the U.S. that have authoritative support

generally accepted accounting principles (GAAP, U.S. GAAP)

the assumption that the business will not liquidate in the near future and that it business will continue to operate and satisfy its obligations

going concern assumption

an intangible asset that results from the acquisition of one company by another for a premium, the amount of which equals the difference between what the purchasing company pays for the target company over the target’s book value

goodwill

assets that do not have physical substance yet often are very valuable. For example, brand names, copyrights, patents, etc.

intangible assets

the primary accounting standard-setting body for most foreign countries. It is the foreign version of the FASB.

International Accounting Standards Board (IASB)

the set of accounting rules and practices adopted by most foreign countries that have the authoritative support of the IASB

International Financial Reporting Standards (IFRS)

degree to which an asset can be converted into cash

liquidity

assets that are generally: 1) investments in stocks and bonds of other corporations that are held for more than one year, and 2) long-term assets, such as land or buildings, not currently used in the company’s operations

long-term investments

obligations that a company expects to pay after one year

long-term liabilities

the constraint of determining whether a financial statement item is large enough to likely influence the decision of an investor or creditor

materiality constraint

only those things that can be expressed in money is included in the financial statements

monetary unit assumption

the average time that it takes a company to convert cash invested in inventory back into cash in producing revenue

operating cycle

are long-term assets that are not classified as investments, property, plant and equipment, or intangible assets

other assets

the life of the business can be divided into artificial time periods (quarter, year, etc.) and that useful reports covering those periods can be prepared for the business

periodicity assumption

assets with relatively long useful lives that are currently used in operating the business. For example, buildings, factories, automobiles, etc

property, plant, and equipment (PP&E)

determines auditing standards and oversees the performance of auditing firms. The PCAOB was created as a result of the Sarbanes-Oxley Act (SOX).

Public Company Accounting Oversight Board (PCAOB)

a fundamental quality of useful information: accounting information is considered relevant if it would make a difference in a business decision

relevance

companies recognize revenue in the period in which it is earned, regardless of when cash is actually received

revenue recognition principle

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

Securities and Exchange Commission (SEC)

a financial statement that presents the factors that caused stockholders’ equity to change during the period

statement of stockholders’ equity

an enhancing quality of useful information: accounting information must be available to decision makers before it loses its capacity to influence decisions

timeliness

shares of the firm’s own stock repurchased in the secondary market

treasury stock

an enhancing quality of useful information: accounting information should be presented in a clear and concise manner

understandability

an enhancing quality of useful information: accounting information is verifiable if we are able to prove it is free from error

verifiability

a measure of a company’s liquidity: the difference between the amounts of current assets and current liabilities

working capital

Working capital=

Current assets - Current liabilities

an individual accounting record of increases and decreases is specific asset, liability, stockholders’ equity, revenue or expense items

account

the system of collecting and processing transaction data and communicating financial information to decision makers

accounting information system

events that require recording in the financial statements because they affect assets, liabilities, or stockholders’ equity

accounting transactions

events that have occurred during the period, but that have yet to be recorded are analyzed, entered into the general journal, and then posted to the general ledger

adjusting entries

prepared using the information from the general ledger, after posting the adjusting entries

adjusted trial balance

The right side of an account. To increase an account with a credit balance, credit the account.

credit

the left side of an account. To increase an account with a debit balance, debit the account.

debit

a system that records the two-sided effect of each transaction in appropriate accounts (i.e. credits and debits)

double-entry system

the most basic form of journal

general journal

a ledger that contains all asset, liability, stockholders’ equity, revenue, and expense accounts

general ledger

an accounting record in which transactions are initially recorded in chronological order

journal

the process of entering transaction data in the journal

journalizing

the group of accounts maintained by a company

ledger

the procedure of transferring journal entry amounts to the ledger accounts

posting

the basic form of an account

T-account

the process of identifying the specific effects of economic events on the accounting equation

transaction analysis

a list of accounts and their balances at a given time

trial balance

an asset management efficiency ratio that measures the number of times that accounts receivable are rolled over each period

accounts receivable turnover ratio

a company’s ability to generate sales from the assets it has acquired

asset management efficiency

a company’s book value is its net assets. In other words, net assets equals total assets less total liabilities, or, net assets = common stockholders’ equity.

book value

common equity divided by the number of outstanding shares of common stock

book value per share

the mixture of debt and equity a firm uses to finance its assets

capital structure

a company financial statement that displays all items as percentages of a common base figure

common size financial statements

a liquidity ratio that measures whether or not the firm has enough current resources to pay its short-term obligations. The current ratio compares current assets to current liabilities.

current ratio

a capital structure ratio that measures how many dollars of debt are used per dollar of equity to finance the firm’s assets. It is an important measure of the firm’s leverage.

debt-to-equity ratio

a capital structure ratio that indicates the percentage of a company’s assets that were financed with debt

debt ratio

a method of assessing a company’s return on equity ratio by breaking it down into three parts: net profit margin, total asset turnover, and an equity multiplier that reflects the use of debt financing

DuPont Identity

captures the effect of the firm's use of debt financing to magnify its return on equity

equity multiplier

an asset management efficiency ratio that measures how effectively a company is using its fixed assets to generate revenue

fixed asset turnover ratio

a profitability ratio that measures how much of every dollar of revenue is left over after accounting for the cost of goods sold

gross profit margin

an asset management efficiency ratio that measures the number of times inventory is sold and replaced in a given time period. This is known as the inventory cycle.

inventory turnover ratio

the extent to which debt is used to finance a firm’s assets

leverage

the amount of capital that is available to meet immediate and short-term obligations. A measure of how well a firm can service its debts using its own assets.

liquidity

a market value ratio that measures the value of a company by comparing the book value of a firm to its market value

market-to-book ratio

the estimated price that a buyer would pay and a seller would accept in an open and competitive market

market value or market price

a profitability ratio that measures how much out of every dollar of sales a company actually keeps in earnings

net profit margin

a profitability ratio the measures how much of every dollar of revenue is left over after accounting for cost of goods sold and operating expenses

operating profit margin

a profitability ratio that measures how effective a company is at controlling operating expenses and how efficient it is at using its assets to generate revenue

operating return on assets (OROA)

a market value ratio used to compare a company’s current share price to its per-share earnings

price-earnings (PE) ratio

the capacity to make a profit: the income earned after deducting all costs and expenses related to generating revenue

profitability

a liquidity ratio that measures a company’s ability to meet its short-term obligations with its most liquid assets – generally cash and accounts receivable

quick ratio or acid-test ratio

a profitability ratio that measures the rate of return on the common shareholders’ investment

return on equity (ROE)

a capital structure ratio that measures the ability of a firm to pay its interest expense

times interest earned ratio

an asset management efficiency ratio that measures how efficient a firm is using its assets to generate sales

total asset turnover ratio

involves the collection of information from past time periods and plotting the information on a trend line for further analysis

trend analysis

a firm that is financed entirely with capital provided by the owners, thus it has no long-term debt

unlevered

Exam 2 Flashcards

(130 cards)