Financial Accounting

By Evelyn Kelley,2014-10-27 16:42
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Financial Accounting

    Key Terms

     Financing Obtaining resources from (a) owners and providing them with a

    activities return on and a return of their investment and (b) creditors and

    repaying amounts borrowed (or otherwise settling the obligation).

    See statement of cash ?ows.

     Dividends A distribution of assets generated from earnings to owners of a

    corporation. The firm may distribute cash (cash dividend), stock

    (stock dividend), property, or other securities (dividend in kind).

    Dividends, except stock dividends, become a legal liability of the

    corporation when the corporation’s board declares them. Hence,

    the owner of stock ordinarily recognizes revenue when the board of

    the corporation declares the dividend, except for stock dividends.

    See also liquidating dividend and stock dividend.

     Investing activities Acquiring and selling securities or productive assets expected to

    produce revenue over several periods.

     Operating For purposes of the statement of cash flows, all transactions and

    activities events that are neither financing activities nor investing activities.

    See operations.

     Annual report to A report prepared once a year for shareholders and other

    shareholders interested parties. It includes a balance sheet, an income

    statement, a statement of cash flows, a reconciliation of changes in

    owners’ equity accounts, a summary of significant accounting

    principles, other explanatory notes, the auditor’s report, and

    comments from management about the year’s events. See 10-K

    and financial statements.

     Management A discussion of management’s views of the company’s

    Discussion and performance; required by the SEC to be included in the 10-K and in

    Analysis the annual report to shareholders. The information typically

    contains discussion of such items as liquidity, results of operations,

    segments, and the effects of inflation.

     Balance sheet Statement of financial position that shows Total Assets = Total

    Liabilities + Owners’

     Equity The balance sheet usually classifies Total Assets as (1) current

    assets, (2) investments, (3) property, plant, and equipment, or (4)

    intangible assets. The balance sheet accounts composing Total

    Liabilities usually appear under the headings Current Liabilities and

    Long-term Liabilities.

     Assets SFAC No. 6 defines assets as “probable future economic benefits

    obtained or controlled by a particular entity as a result of past

    transactions. . . . An asset has three essential characteristics: (a) it

    embodies a probable future benefit that involves a capacity, singly

    or in combination with other assets, to contribute directly or

    indirectly to future net cash inflows, (b) a particular entity can obtain

    the benefit and control others’ access to it, and (c) the transaction

    or other event giving rise to the entity’s right to or control of the

    benefit has already occurred.” A footnote points out that “probable”

    means that which we can reasonably expect or believe but that is

    not certain or proved. You may understand condition (c) better if

    you think of it as requiring that a future benefit cannot be an asset if

    it arises from an executory contract, a mere exchange of promises.

    Receiving a purchase order from a customer provides a future

    benefit, but it is an executory contract, so the order cannot be an

    asset. An asset may be tangible or intangible, short-term (current)

     or long-term (noncurrent).

     Liabilities An obligation to pay a definite (or reasonably definite) amount at a

    definite (or reasonably definite) time in return for a past or current

    benefit (that is, the obligation arises from a transaction that is not

    an executory contract); a probable future sacrifice of economic

    benefits arising from present obligations of a particular entity to

    transfer assets or to provide services to other entities in the future

    as a result of past transactions or events. SFAC No. 6 says that

    “probable” refers to that which we can reasonably expect or believe

    but that is neither certain nor proved. A liability has three essential

    characteristics: (1) the obligation to transfer assets or services has

    a specified or knowable date, (2) the entity has little or no discretion

    to avoid the transfer, and (3) the event causing the obligation has

    already happened, that is, it is not executory.

     Shareholders’ Proprietorship or owners’ equity of a corporation. Because stock

    equity means inventory in Australia, the UK, and Canada, their writers use

    the term “shareholders’ equity” rather than the term “stockholders’


     Contributed Name for the owners’ equity account that represents amounts paid

    capital in, usually in cash, by owners; the sum of the balances in capital

    stock accounts plus capital contributed in excess of par (or stated)

    value accounts. Contrast with donatedc apital.

     Retained earnings Net income over the life of a corporation less all dividends

    (including capitalization through stock dividends); owners' equity

    less contributed capital.

     Historical Showing balance sheet amounts at acquisition cost, sometimes

    valuation reduced for accumulated amortization; sometimes reduced to lower

    of cost or market.

     Income statement The statement of revenues, expenses, gains, and losses for the

    period, ending with net income for the period. Accountants usually

    show the earnings-per-share amount on the income statement; the

    reconciliation of beginning and ending balances of retained

    earnings may also appear in a combined statement of income and

    retained earnings. See income from continuing operations, income

    from discontinued operations, extraordinary items, multiple-step,

    and single-step.

     Net income, The excess of all revenues and gains for a period over all

    earnings expenses and losses of the period. The FASB is proposing to

    discontinue use of this term and substitute earnings. See

    comprehensive income.

     Revenues The owners’ equity increase accompanying the net assets increase

    caused by selling goods or rendering services; in short, a service

    rendered; sales of products, merchandise, and services and

    earnings from interest, dividends, rents, and the like. Measure

    revenue as the expected net present value of the net assets the

    firm will receive. Do not confuse with receipt of funds, which may

    occur before, when, or after revenue is recognized. Contrast with

    gain and income. See also holding gain. Some writers use the term

    gross income synonymously with revenue; avoid such usage.

     Expenses As a noun, a decrease in owners’ equity accompanying the

    decrease in net assets caused by selling goods or rendering

    services or by the passage of time; a “gone” (net) asset; an expired

    cost. Measure expense as the cost of the (net) assets used. Do not

    confuse with expenditure or disbursement, which may occur

    before, when, or after the firm recognizes the related expense. Use

    the word “cost” to refer to an item that still has service potential and

    is an asset. Use the word “expense” after the firm has used the

    asset’s service potential. As a verb, “expense” means to designate

    an expenditurepast, current, or futureas a current expense.

     Net loss The excess of all expenses and losses for a period over all

    revenues and gains of the period; negative net income.

     Statement of cash A schedule of cash receipts and payments, classified by investing, flows financing, and operating activities; required by the FASB for all for-

    profit companies. Companies may report operating activities with

    either the direct method (which shows only receipts and payments

    of cash) or the indirect method (which starts with net income and

    shows adjustments for revenues not currently producing cash and

    for expenses not currently using cash). “Cash” includes cash

    equivalents such as Treasury bills, commercial paper, and

    marketable securities held as current assets. This is sometimes

    called the “funds statement.” Before 1987, the FASB required the

    presentation of a similar statement called the statement of changes

    in financial position, which tended to emphasize working capital,

    not cash.

     Unqualified, See auditor’s report.

    qualified opinion

     Disclaimer of An auditor’s report stating that the auditor cannot give an opinion opinion on the financial statements. Usually results from material

    restrictions on the scope of the audit or from material uncertainties,

    which the firm has been unable to resolve by the time of the audit,

    about the accounts.

     Adverse opinion An auditor’s report stating that the financial statements are not fair

    or are not in accord with GAAP.

     Securities and An agency authorized by the U.S. Congress to regulate, among Exchange other things, the financial reporting practices of most public Commission corporations. The SEC has indicated that it will usually allow the

    (SEC) FASB to set accounting principles, but it often requires more

    disclosure than the FASB requires. The SEC states its accounting

    requirements in its Accounting Series Releases (ASR), Financial

    Reporting Releases, Accounting and Auditing Enforcement

    Releases, Staff Accounting Bulletins (these are, strictly speaking,

    interpretations by the accounting staff, not rules of the

    commissioners themselves), and Regulations S-X. See also

    registration statement, 10-K, and 20-F.

     secret reserve Hidden reserve.

     Financial An independent board responsible, since 1973, for establishing

    Accounting generally accepted accounting principles. Its official Standards Board pronouncements are Statements of Financial Accounting Concepts (FASB) (SFAC), Statements of Financial Accounting Standards (SFAS),

    and FASB.

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