Accounting Chapter 2: Wiley Plus Flashcards

Questions and Answers

What are current assets?

Intangible assets

Investments in real estate

Obligations that a company expects to pay within the next year

Cash and other assets expected to be exchanged for cash or consumed within a year (correct)

What is the Operating Cycle?

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

What is depreciation?

The allocation of the cost of an asset to a number of years (correct)

An obligation due within one year

Cash and other assets expected to be exchanged for cash

A measure of liquidity

What are current liabilities?

Obligations expected to be paid within the next year or operating cycle Signup and view all the answers

What is the definition of liquidity ratios?

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

What does the Current Ratio indicate?

Current assets divided by current liabilities Signup and view all the answers

What is the definition of solvency?

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

What does the term 'Earnings Per Share (EPS)' refer to?

A measure of the income earned on each share of common stock Signup and view all the answers

What is the purpose of the Full Disclosure Principle?

Requires that companies disclose all circumstances and events that would make a difference to financial statement users. Signup and view all the answers

What does GAAP stand for?

Generally Accepted Accounting Principles Signup and view all the answers

What is the role of the Securities and Exchange Commission (SEC)?

To enforce securities laws and protect investors Signup and view all the answers

Study Notes

Current Assets

Current assets include cash and other assets expected to be converted into cash or consumed within one year.
Key components: cash, receivables, inventories, prepaid expenses.

Operating Cycle

Represents the average duration to purchase inventory, sell it on credit, and collect cash from customers.
Describes the transformation from cash to cash.

Cash

Considered a primary asset in accounting.

Receivables

This includes accounts receivable, notes receivable, and interest receivable, categorized as assets.

Inventories

Stock held for sale or production, classified as an asset.

Prepaid Expenses

Costs paid in advance for services (like insurance or supplies), recognized as assets until consumed.

Depreciation

Process of allocating an asset's cost over its useful life.

Liabilities

Current liabilities are obligations due within one year or the operating cycle.
Long-term liabilities are obligations due beyond one year.

Bonds Payable

A type of long-term liability representing borrowed funds.

Mortgages Payable

Long-term obligations involving real estate loans.

Intangible Assets

Includes patents, copyrights, and trademarks, representing non-physical value.

Long-Term Investments

Examples include long-term notes receivable and investments in real estate.

Ratios in Financial Analysis

Profitability ratios assess a company's income over a period.
Liquidity ratios gauge short-term financial stability and cash needs.
Solvency ratios measure long-term survival capabilities.

Comparison Types

Intracompany comparisons involve evaluating financial data across two years for the same company.
Industry-average comparisons benchmark against average ratios in specific industries.
Intercompany comparisons assess performance against direct competitors.

Ratio Analysis

Examines the relationships among various elements of financial statements.

Indicates net income attributed to each share of common stock.

Working Capital

Calculated as the difference between current assets and current liabilities.

Current Ratio

A liquidity measure obtained by dividing current assets by current liabilities.

Solvency

Refers to a firm's capability to meet its long-term obligations.

Debt to Assets Ratio

Measures the proportion of total financing sourced from creditors, calculated by total liabilities divided by total assets.

Free Cash Flow

Represents the net cash available after accounting for capital expenditures and dividends.

Accounting Principles and Standards

Generally Accepted Accounting Principles (GAAP) guide financial statement preparation.
The Securities and Exchange Commission (SEC) regulates U.S. financial markets.
Financial Accounting Standards Board (FASB) sets primary accounting standards in the U.S.
International Accounting Standards Board (IASB) issues standards widely adopted outside the U.S.

Valuation Principles

Historical Cost Principle mandates recording assets at their acquisition cost.
Fair Value Principle emphasizes reporting assets and liabilities at fair market value.

Disclosure Principles

Full Disclosure Principle requires transparency in reporting material circumstances affecting financial statements.
Cost Constraint balances the cost of information disclosure against the benefits to users.

Description

Test your knowledge of key terms and concepts from Chapter 2 of Accounting using this flashcard quiz. This quiz covers essential vocabulary, including current assets, operating cycles, and cash. Perfect for students preparing for assessments or wanting to strengthen their understanding of accounting principles.