Key Terms
- accounting equation
- accrual basis
- accounting system in which revenue is recorded or recognized when earned yet not necessarily received, and in which expenses are recorded when legally incurred and not necessarily when paid
- assets
- tangible or intangible resources owned or controlled by a company, individual, or other entity with the intent that they will provide economic value
- cash basis
- method of accounting in which transactions are not recorded in the financial statements until there is an exchange of cash
- current assets
- asset typically used up, sold, or converted to cash in one year or less
- current liabilities
- debt or obligation due within one year or, in rare cases, a company’s standard operating cycle, whichever is greater
- depreciation
- process of allocating the costs of a tangible asset over the asset’s economic life
- direct method
- approach used to determine net cash flows from operating activities, whereby accrual basis revenue and expenses are converted to cash basis collections and payments
- dividends
- portion of the net worth (equity) that is returned to owners of a corporation as a reward for their investment
- expenses
- costs associated with providing goods or services
- free cash flow
- operating cash, reduced by expected capital expenditures
- gains
- increases in organizational value from activities that are “incidental or peripheral” to the primary purpose of the business
- income statement
- financial statement that measures the organization’s financial performance for a given period of time
- indirect method
- approach used to determine net cash flows from operating activities, starting with net income and adjusting for items that impact new income but do not require outlay of cash
- liabilities
- probable future sacrifice of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events
- loss
- decrease in organizational value from activities that are “incidental or peripheral” to the primary purpose of the business
- net income
- revenues and gains that are greater than expenses and losses
- noncash expenses
- expenses that reduce net income but are not associated with a cash flow; most common example is depreciation expense
- noncurrent assets
- assets used in the normal course of business for more than one year that are not intended to be resold
- noncurrent liabilities
- liabilities that are expected to be settled in more than one year
- owner’s equity
- residual interest in the assets of an entity that remains after deducting its liabilities
- retained earnings
- cumulative, undistributed net income or net loss for the business since its inception
- revenue
- inflows or other enhancements of assets of an entity or settlements of liabilities from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations
- statement of cash flows
- financial statement listing the cash inflows and cash outflows for the business for a period of time