ACC6901 CH2 - Measuring Income to Assess Performance
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What is the operator cycle (cash cycle)?
The time elapsing between the acquisition of goods and services in exchange for cash and the subsequent sale of products to customers, who in turn pay for their purchases with cash.
What is the fiscal year?
The year established for accounting purposes, which may differ from the calendar year.
What are interim periods?
The time spans established for accounting purposes that are less than a year.
What is revenue (sales, sales revenue)?
The increase in net assets resulting from selling products or services.
Revenues increase owners' equity.
What are expenses?
Decreases in net assets as a result of consuming or giving up resources in the process of providing products or services to a customer
Expenses decrease owners' equity.
What is income (profits, earnings)?
The excess of revenues over expenses.
What are retained earnings (retained income)?
Total cumulative owners' equity generated by income or profits.
What are accounts receivable (trade receivables, receivables)?
Amounts owed to a company by customers as a result of the company's delivering goods or services and extending credit in the ordinary course of business.
What are cost of goods sold (cost of sales, cost of revenue)?
The original acquisition cost of the inventory that a company sells to customers during the reporting period.
What is an accrual basis (method)?
Accounting method in which accountants record revenue as a company earns it and expenses as the company incurs them - regardless of when cash changes hands.
What is the cash basis (method)?
Accounting method that recognizes revenue when a company receives cash and recognizes expenses when it pays cash.
What is revenue recognition?
Criteria for determining whether to record revenue in the financial statements of a given accounting period.
To be recognized, revenues must be earned and realized or realizable.
What are product costs?
Costs that are linked with revenues and are charged as expenses when the related revenue is recognized.
What is matching?
The recording of expenses in the same time period that we recognize the related revenues.
What are period costs?
Expenses supporting a company's operations for a given period.
We record these expenses in the time period in which the company incurs them.
What is depreciation?
The systematic allocation of the acquisition cost of long-lived assets to the expense accounts of the particular accounting periods that benefit from the use of the assets.
What is an income statement?
(statement of earnings, statement of operations)
A report of all revenues and expenses pertaining to a specific time period.
What is net income?
The difference between revenues and expenses when expenses exceed revenues.
What are cash dividends?
Distributions of cash to stockholders that reduce retained earnings.
What is a statement of stockholders' equity?
(statement of stockholders' equity)
A statement that shows all changes during the year in each stockholders' equity account.
What is other comprehensive income (OCI)?
Changes in stockholders' equity that do not result from net income (net loss) or transactions with shareholders.
What is accumulated other comprehensive income (AOCI)?
Stockholders' equity account that contains a cumulative total of all items classified as other comprehensive income.
What is accumulated deficit?
A more descriptive term for retained earnings when the accumulated net losses plus dividends exceed accumulated net income.
What are earnings per share (EPS)?
Net income divided by the weighted-average number of common shares outstanding during the period over which the net income is measured.
What is a price-earnings (P-E) ratio?
Market price per share of common stock divided by earnings per share of common stock.
AKA earnings multiple
What is a dividend-yield ratio?
Common dividends per share divided by market price per share.
What is the dividend-payout ratio?
Common dividends per share divided by earnings per share.
What is the objective of financial reporting?
To provide information that is useful to present and potential investors and creditors and others in making investment, credit, and similar resource allocation decisions.
What is relevance?
The capability of information to make a difference to the decision maker.
What is predictive value?
A quality of information that allows it to help users form their expectations about the future.
What is confirmatory value?
A quality of information that allows it to confirm or contradict existing expectations.
What is faithful representation?
a quality of information that ensures that it captures the economic substance of the transactions, events, or circumstances it describes. It requires information to be complete, neutral and free from material errors.
What is comparability?
a characteristic of information produced when all companies use similar concepts and measurements and use them consistently.
What is consistency?
Using the same accounting policies and procedures from period to period.
What is verifiability?
A characteristic of information that can be checked to ensure it is correct.
What is timeliness?
A characteristic of information that requires information to reach decision makers while it can still influence their decisions.
What is understand-ability?
A characteristic of information that requires information to be presented clearly and concisely.
What is the cost-effectiveness constraint?
Requirement that standard setting bodies choose rules whose decision-making benefits exceed the costs of providing the information.
What is going concern (continuity)?
A convention that assumes that an entity will persist indefinitely.
What is materiality?
A convention that asserts that an item should be included in a financial statement if its omission or misstatement would tend to mislead the reader of the financial statements under consideration.
What is a stable monetary unit?
A monetary value that is not expected to change in value significantly over time.
What is the periodicity convention?
Related to the information characteristic of timeliness, this convention requires that a company break up its economic activity into artificial time periods that will provide timely information to users.
What is reliability?
A quality of information that assures decision makers that the information captures the conditions or events it purports to represent.
How accountants measure income, recording revenue from a sale, recording expenses, income statement, cash dividends and stockholders' equity, ratios, accounting standards and regulation trade offs, entity, going concern, materiality, stable monetary unit, periodicity, and reliability.