ACG3101 Exam 1 Vocabulary Terms Vocabulary Financial Accounting Accrual Accounting Managerial Accounting Provides relevant financial information to various Provides relevant financial information to various Measurement of entity s accomplishments and resource Cash Basis Accounting Net Operating Cash Flow external users internal users sacrifices during the period regardless of when cash is received or paid Difference between cash receipts and cash disbursements during a reporting period from transactions related to providing goods and services to customers Generally Accepted Accounting Principles GAAP specific guidelines that companies should follow when measuring and reporting the information in their financial statements and related notes Decision Usefulness Fundamental Characteristics The quality of being useful to decision making Set of both broad and o Relevance One of the primary decision specific qualities that make accounting information useful made up of predictive value and or feedback value and timeliness Exists when there is agreement between a measure or description and the phenomenon it purports to represent o Faithful Representation Enhancing Characteristics The ability to help users see similarities and o Comparability o Consistency o Verifiability o Timeliness differences among events and conditions allow its use in the decision process context of a particular date o Understandability Permits valid comparisons between different periods Implies a consensus among different measurers Information that is available to users early enough to Users must understand the information within the Constraints o Materiality o Cost Effectiveness The perceived benefit of increased decision If a more costly way of providing information is not usefulness exceeds the anticipated cost of providing that information expected to have a material effect on decisions made by those using the information the less costly method may be acceptable uncertainties and risks inherent in business situations are adequately considered Practice followed in an attempt to ensure that o Conservatism Elements of Financial Statements o Assets Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events present obligations of a particular entity to transfer assets or provide Probable future sacrifices of economic benefits arising from o Liabilities o Equity Net Assets services to other entities in the future as a result of past transactions or events for a corporation the residual interest in the assets of an entity that remains after deducting liabilities Called shareholders equity or stockholders equity Paid in Capital Invested capital consisting primarily of amounts invested by shareholders when they purchase shares of stock from the corporation Accounts earned by the corporation on behalf of its shareholders and not yet distributed to them as dividends Retained Earnings o Gains o Revenues Outflows or other using up of assets or incurrences of Inflows or other enhancements of assets or settlements of liabilities from delivering or producing goods rendering services or other activities that constitute the entity s ongoing major or central operations o Expenses liabilities during a period from delivering or producing goods rendering services or other activities that constitute the entity s ongoing major or central operations an entity transactions of an entity o Investment by Owners resources usually cash to a company in exchange for ownership interest owners Increases in equity from peripheral or incidental transactions of Decreases in equity arising from peripheral or incidental Increases in equity resulting from transfers of Decreases in equity resulting from transfers to o Distribution to Owners o Losses Process of admitting information into the basis financial Recognition statements Measurement Process of associating numerical amounts to their elements Assumptions d o Economic Entity o Going Concern In the absence of information to the contrary it is anticipated that a business entity will continue to operate indefinitely Allows the life of a company to be divided into artificial time periods to provide timely information measured in terms of the United States dollar States that financial statement elements should be o Monetary Unit o Periodicity Principles o Historical Cost States that asset and liability measurements should be based on the amount given or received in the exchange transaction Provides relevant cash flow information and also is highly variable can be recognized Requires that two criteria must be satisfied before revenue o Realization The earnings process is judged to be complete or virtually complete There is reasonable certainty as to the collectability of the asset to be received usually cash o Matching o Full Disclosure States that expenses are recognized in the same period as the related revenues There is a cause and effect relationship between revenue and expense recognition implicit in this definition information that could affect the decisions made by external users The benefits of that information should exceed the costs of providing the information Supplemental information is disclosed in a variety of ways including Means that the financial reports should include any Disclosure Notes Paranthetical Comments or Modifying Comments the face of financial statements operations accounting principles contractual agreements and pending litigation Supplemental Financial Statements information than is shown in the primary financial statements Conveying additional insights about company That report more detailed placed on Fair Value The price that would be received to sell assets or paid to transfer a liability in an orderly transaction between market participants at the measurement date Can be measured using o Market Approaches o Income Approaches o Cost Approaches o External Event entity company s financial position o Internal Event Economic Event Can cause changes in the financial position of the company Involves an exchange between the company and another Do not involve an exchange transaction but do affect the Refers to the dual effect that each transaction has on the Storage areas to keep track of the increases and decreases in financial Underlies the process used to capture the effect of Account Accounting Equation Double Entry System economic events Assets Liabilities Owners Equity accounting equation position elements