Purpose of Income Statement Summarize profit generating activities that

occurred during a particular period

Operating Performance net profit or loss during the reporting
period
Income from Continuing Operations Includes the revenues, expenses, gains and
losses that will probably continue in future
periods
Revenue inflows of resources resulting from
providing goods or services to customers
Expenses Outflows of resources incurred while
generating revenue
Operating Income Includes revenues and expenses directly
related to the principal revenue-generating
activities of the compan
Nonoperating Income Includes gains and losses and revenues and
expenses related to peripheral or incidental
activities of the company
Gains and Losses Increases or decreases in equity from
peripheral or incidental transactions of an
entity
EPS shows the amount of income earned by a
company expressed on a per share basis
Basic EPS Net Income less Preferred Dividends/
Weighted-Avg. Number of Common
Shares Outstanding for the Period
Diluted EPS Reflects the potential dilution that could
occur for companies that have certain
securities outstanding that are convertible
into common shares or stock options that
could create additional common shares if
the options were exercised
Companies must disclose per share 1) Income or loss from continuing
amounts for: operations
2) Each Separately Reported Item
3) Net Income or Loss
Earnings Quality refers to the ability of reported earnings to
predict
a company's future earnings
To enhance predictive value, analysts try Transitory Earnings from its Permanent
to separate: Earnings
Transitory Earnings Effects result from transactions or events that are
not likely to occur again in the foreseeable
future, or will have a different impact on
earnings
Income Statement Classification Two Major Methods Managers Use To
Manipulate Income
Income Shifting
Income Shifting achieved by accelerating or decelerating the
recognition of revenues or expenses
Restructuring Costs include costs associated with shutdown or
relocation of facilities or downsizing of
operations
Examples of Transitory Items Special Items
Discontinued Operations
Extraordinary Items
Pro-forma Earnings Attempt by companies to identify the
recurring portion of thier income; managers
assessment of permanent earnings
Comprehensive Income Net Income + OCI
Comprehensive Income income includes all changes in equity
during a period except those resulting from
investments by owners and distributions to
owners
OCI includes transactions affecting the net
assets of the firm that are considered by
FASB to be events outside of
management's control
 An organized array of assets, liabilities, and
Balance Sheet equity

Liquidity Relates to the amount of time before an asset is

converted to cash or a liability is paid

Current Assets Items expected to be converted to cash or consumed

within one year or the operating cycle, whichever is
longer

Operating Cycles Cash to Cash

Current Liabilities Will be satisfied through the use of current assets

Cash Equivalent One-month U.S. Treasury bill

Intangible Asset Lacks physical substance

Working Capital Current assets - current liabs

Accrued liabs Recorded when an expense is incurred but not yet

paid

Sum of sig . acct. policies Important to user in comparing financial

information across companies

Subsequent events Occurs after the fiscal year-end but before the
statements are issued

Unqualified opinion The statements are presented fairly in conformity

with GAAP
 Qualified opinion Scope limitation or a departure from GAAP

Term Definition
General Purpose Financial Reporting Proving financial information about the reporting
entity that is useful to existing and potential
investors, lenders and other creditors in making
decisions about providing resources to the entity.

Term Definition
FASB Financial Accounting Standards Board

Term Definition
Basic Accounting Equation Assets = Liabilities + Owner's Equity

Term Definition
External Events Those events between the enterprise and it's
environment.

Term Definition
Internal Events Relate to transactions totally within the
enterprise.

Term Definition
Account A systematic arrangement that shows the effect of
transactions and other events on a specific asset,
liability or equity.

Term Definition
Accrued Expenses Expenses incurred but not yet paid.

Term Definition
Accrued Revenues Revenues for which the performance obligation
has been satisfied but for which cash has not yet
been received.

Term Definition
Adjusted Trial Balance A trial Balance prepared immediately after all
adjustments have been posted.

Term Definition
 Adjusting Entries Entries made at the end of an accounting period
to bring all accounts up to date on an accrual
accounting basis.

Term Definition
Balance Sheet The financial statement that shows the financial
condition of the enterprise at the end of the
period.

Term Definition
Closing Entries The formal process by which all nominal accounts
are reduced to zero and the net income or loss is
determined and transferred to the owners' equity
account.

Term Definition
Credit The right hand side of an account

Term Definition
Debit the left hand side of an account.

Term Definition
Double entry system a system that records the dual effects of each
transaction in its appropriate account.

Term Definition
Event A happening of consequence.

Term Definition
Financial Statements Statements that reflect the collection, tabulation,
and final summarization of the accounting data.

Term Definition
General Ledger A collection of all the asset, liability, owners'
equity, revenue, and expense accounts.

Term Definition
Income statement the financial statement which measures the
results of operations during the period.

Term Definition
Journal the book of original entry where transactions and
selected other events are initially recorded.

Term Definition
 Ledger the book containing the accounts.

Term Definition
nominal accounts temporary accounts are revenue, expense and
dividend accounts except for dividends they
appear on the income statement.

Term Definition
post closing trial balance a trial balance prepared immediately after closing
entries have been posted.

Term Definition
posting the process of transferring the essential facts and
figures from the book of original entry to the
ledger accounts.

Term Definition
prepaid expense an item paid and recorded in advance of its use or
consumption, part of it properly represents
expense of the current period and part represents
an asset on hand at the end of the period.

Term Definition
Real Accounts real accounts are assets, liabilities, and equity
accounts and they appear on the balance sheet.

Term Definition
Reversing Entries Entries at the beginning of the next accounting
period that are the exact opposite of the adjusting
entries made in the previous period.

Term Definition
Statement of cash flows the financial statement which measures the cash
provided and used by operating, investing, and
financing activities during the period.

Term Definition
Statement of retained earnings the financial statement which reconciles the
balance of the retained earnings account from the
beginning to the end of the period.

Term Definition
subsidiary ledger contains the details related to a given general
ledger account.
Term Definition
transaction an external event involving transfer or exchange
between two or more entities.

Term Definition
trial balance a list of all open accounts in the ledger and their
balances.

Term Definition
unearned revenue cash received and recorded as a liability because
the service obligation has not yet been satisfied by
providing goods or services to customers.

Term Definition
work sheet a worksheet used to help a company prepare its
financial statements.

Term Definition
Depreciation, Amortization and Depletion parts of the original cost is an expense each
period the assets are used by the company.

Term Definition
Predictive Value The information can help users form expectations
about the future.

Term Definition
Confirmatory Value the information validates or refutes expectations
based on previous evaluations.

Term Definition
Materiality information is material if omitting it or misstating
it could influence decisions that users make on the
basis of the reported financial information.

Term Definition
completeness all necessary information is provided

Term Definition
neutrality the information is unbiased

Term Definition
free from error the information is accurate

Term Definition
Assets probable future economic benefits obtained or
 controlled by a particular entity as a result of past
transactions or events.

Term Definition
Liabilities probable future sacrifices 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.

Term Definition
Equity Residual interest in the assets of an entity that
remains after deducting its liabilities. In a
business enterprise, the equity is the ownership
interest.

Term Definition
Investments by Owners Increases in net assets of a particular enterprise
resulting from transfers to it from other entities
of something of value to obtain or increase
ownership interests in it. Assets are most
commonly received as investments by owners, but
that which is received may include services or
satisfaction or conversion of liabilities of the
enterprise.

Term Definition
Distributions to Owners Decrease in net assets of a particular enterprise
resulting from transferring assets, rendering
services, or incurring liabilities by the enterprise
to owners. Distributions to owners decrease
ownership interests in an enterprise.

Term Definition
Comprehensive Income Change in equity of an entity during a period
from transactions and other events and
circumstances from non-owner sources. it
includes all changes in equity during a period
except those resulting from investments by
owners and distributions to owners.

Term Definition
revenues inflows or other enhancements of assets of an
entity or settlement of its liabilities during a
 period from delivering or producing goods,
rendering services, or other activities that
constitute the entities ongoing major or central
operations.

Term Definition
expenses outflows or other using up of assets or
incurrences of liabilities during a period from
delivering or producing goods, rendering services,
or carrying out other activities that constitute the
entity's ongoing major or central operations.

Term Definition
gains increases in equity from peripheral or incidental
transactions of an entity and from all other
transactions and other events and circumstances
affecting the entity during a period except those
that result from revenues or investments by
owners.

Term Definition
losses decrease in equity from peripheral or incidental
transactions of an entity and from all other
transactions and other events and circumstances
affecting the entity during a period except those
that result from expenses or distributions to
owners.

Term Definition
Economic Entity Assumption The economic activities of a company can be
accumulated and reported in a manner that
assumes the company is separate and distinct
from its owners or other business units.

Term Definition
Going Concern Assumption In the absence of contrary information, a
company is assumed to have a long life. The
current relevance of the historical cost principle is
dependent on this assumption.

Term Definition
monetary unit assumption money is the common denominator of economic
activity and provides an appropriate basis for
accounting measurement and analysis. Assumed
 to remain stable over the years in terms of
purchasing power. In essence, this assumption
disregards any inflation or deflation in the
economy in which the company operates.

Term Definition
Periodicity Assumption The life of a company can be divided into
artificial time periods for the purpose of
providing periodic reports on the economic
activities of the company.

Term Definition
Historical cost principle acquisition cost is considered a reliable basis upon
which to account for assets and liabilities of a
company.

Term Definition
Fair Value the price that would be received to sell an asset or
paid to transfer a liability in an orderly
transaction between market participants at the
measurement date.

Term Definition
Expense Recognition Principle recognition of expenses is related to the net
changes in assets and earning revenues. Is
implemented in accordance with the definition of
expense by matching efforts with
accomplishments.

Term Definition
Full Disclosure Principle in the preparation of financial statements, the
accountant should include sufficient information
to permit the knowledgeable reader to make an
informed judgment about the financial condition
of the company in question.

Term Definition
Cost relates to the notion that the benefits to be
derived from providing certain accounting
information should exceed the costs of providing
that information.

Term Definition
Earnings Per Share is the amount of a company's current period
 earnings attributable to one share of common
stock.

Term Definition
retained earnings cumulative earnings less cumulative dividend
distributions since inception.

Term Definition
deficit a debit balance in retained earnings

Term Definition
Restricted retained earnings may be disclosed parenthetically alongside the RE
balance or in footnote.

Term Definition
appropriated re recorded in separate account

Term Definition
paid in capital total amount invested by the stockholders
(preferred stock, common stock)

Term Definition
accumulated other comprehensive income specific types of gains or losses that are not
included in net income

Term Definition
treasury stock shares of the corporation stock that it has
purchased or reacquired. considered issued but
no longer are outstanding.

Term Definition
current assets cash, converted cash, sold, or consumed during
the normal operating cycle of the business.

Term Definition
current liabilities obligations which mature or are settled within
year or operating cycle of business.

Term Definition
liquidity means an entity's ability to settle its obligations as
they mature