Financial Accounting Vocabulary
Chapters 1-12 Exam Test Guide
Questions and Answers
Accounts Payable - Answer-A liability backed by the general reputation and credit
standing of the debtor.
Accounting - Answer-The information system that measures business activities,
processes that information into reports and financial statements, and communicates the
results to decision makers.
Accounting Equation - Answer-The most basic tool of accounting: Assets = Liabilities +
Owners' Equity.
Asset - Answer-An economic resource that is expected to be of benefit in the future.
Balance Sheet - Answer-List of an entity's assets, liabilities, and owners' equity as of a
specific date. Also called the statement of financial position.
Board of Directors - Answer-Group elected by the stockholders to set policy for a
corporation and to appoint its officers.
Capital - Answer-Another name for the owners' equity of a business.
Cash - Answer-Money and any medium of exchange that a bank accepts at face value.
Common Stock - Answer-The most basic form of capital stock.
Going-concern (continuity) Assumption - Answer-Holds that the entity will remain in
operation for the foreseeable future.
Corporation - Answer-A business owned by stockholders. It's a legal entity, an "artificial
person" in the eyes of the law.
Current Asset - Answer-An asset that is expected to be converted to cash, sold or
consumed during the next 12 months, or within the business's normal operating cycle if
longer than a year.
Current Liability - Answer-A debt due to be paid within one year or within the entitys
operating cycle if its longer than a year.
Deficit - Answer-Negative balance in retained earnings caused by net losses over a
period of years.
,Dividends - Answer-Distributions (usually cash) by a corporation to its stockholders.
Entity - Answer-An organization/section that, for accounting purposes, stands apart from
other organizations and individuals as a separate economic unit.
Ethics - Answer-Standards of right and wrong that transcends economic and legal
boundaries. These standards deals with the way you treat others and restrain our own
actions because of the desires, expectations, or rights of others, or with our obligations
to them.
Expenses - Answer-Decrease in retained earnings that results from operations, the cost
of doing business; opposite of revenues.
Fair Value - Answer-The amount that a business could sell an asset for, or the amount
that a business could pay to settle a liability.
Financial Accounting - Answer-The branch of accounting that provides information to
people outside the firm.
Financial Statements - Answer-Business documents that report financial information
about a business entity to decision makers.
Financial Activities - Answer-Activities that obtain from investors and creditors the cash
needed to launch and sustain the business; a section of the statement of cash flows.
Fixed Assets - Answer-Another name for property, plant, and equipment.
Generally Accepted Accounting Principles (GAAP) - Answer-Accounting guidelines,
formulated by the Financial Accounting Standards Board, that govern how accounting is
practiced.
Historical Cost Principle - Answer-Principle that states that assets and services should
be recorded at their actual cost.
Income Statement - Answer-A financial statement listing an entity's revenues,
expenses, and net income or net loss for a specific period. Also called the statement of
operations.
International Financial Reporting Standards (IFRS) - Answer-Accounting guidelines,
formulated by the International Accounting Standards Board (IASB). By 2014, U.S.
GAAP is expected to be harmonized with IFRS. At that times, U.S. companies are
expected to adopt these principles for their financial statements, so that they can be
compared with those of companies from other countries.
, Investing Activities - Answer-Activites that increase/decrease the long-term assets
available to the business; a section of the statement of Cash flows.
Liability - Answer-An economic obligation (debt) payable to an individual/organization
outside the business.
Limited Liability Company (LLC) - Answer-A business organization in which the
business organization in which the business (not the owner) is liable for the company's
debts.
Long-term Debt - Answer-A liability that falls due beyond one year from the date of the
financial statements.
Management Accounting - Answer-The branch of accounting that generates information
for the internal decision makers of a business, such as top executives.
Merchandise Inventory - Answer-The merchandise that a company sells to customers,
also called inventory.
Net Earnings - Answer-Another name for Net Income.
Net Income - Answer-Excess of total revenues over total expenses.
Net Profit - Answer-Another name for Net Income.
Note Payable - Answer-A liability evidenced by a written promise to make a future
payment.
Operating Activities - Answer-Activities that create revenue/expenses in the entity's
major line of business; a section of the statement of cash flows. These activities affect
the income statement.
Owners' Equity - Answer-The claim of the owners of a business to the business. Also
called capital, stockholders' equity, or net assets.
Paid-in Capital - Answer-The amount of stockholders equity that stockholders have
contributed to the operation. Also called contributed capital.
Partnership - Answer-An association of two or more persons who co-wn business for
profit.
Plant Assets - Answer-Another name for property, plant, and equipment.
Property, plant, and equipment - Answer-Long-lived assets, used in the operation of the
business. Also called plant assets or fixed assets.
Chapters 1-12 Exam Test Guide
Questions and Answers
Accounts Payable - Answer-A liability backed by the general reputation and credit
standing of the debtor.
Accounting - Answer-The information system that measures business activities,
processes that information into reports and financial statements, and communicates the
results to decision makers.
Accounting Equation - Answer-The most basic tool of accounting: Assets = Liabilities +
Owners' Equity.
Asset - Answer-An economic resource that is expected to be of benefit in the future.
Balance Sheet - Answer-List of an entity's assets, liabilities, and owners' equity as of a
specific date. Also called the statement of financial position.
Board of Directors - Answer-Group elected by the stockholders to set policy for a
corporation and to appoint its officers.
Capital - Answer-Another name for the owners' equity of a business.
Cash - Answer-Money and any medium of exchange that a bank accepts at face value.
Common Stock - Answer-The most basic form of capital stock.
Going-concern (continuity) Assumption - Answer-Holds that the entity will remain in
operation for the foreseeable future.
Corporation - Answer-A business owned by stockholders. It's a legal entity, an "artificial
person" in the eyes of the law.
Current Asset - Answer-An asset that is expected to be converted to cash, sold or
consumed during the next 12 months, or within the business's normal operating cycle if
longer than a year.
Current Liability - Answer-A debt due to be paid within one year or within the entitys
operating cycle if its longer than a year.
Deficit - Answer-Negative balance in retained earnings caused by net losses over a
period of years.
,Dividends - Answer-Distributions (usually cash) by a corporation to its stockholders.
Entity - Answer-An organization/section that, for accounting purposes, stands apart from
other organizations and individuals as a separate economic unit.
Ethics - Answer-Standards of right and wrong that transcends economic and legal
boundaries. These standards deals with the way you treat others and restrain our own
actions because of the desires, expectations, or rights of others, or with our obligations
to them.
Expenses - Answer-Decrease in retained earnings that results from operations, the cost
of doing business; opposite of revenues.
Fair Value - Answer-The amount that a business could sell an asset for, or the amount
that a business could pay to settle a liability.
Financial Accounting - Answer-The branch of accounting that provides information to
people outside the firm.
Financial Statements - Answer-Business documents that report financial information
about a business entity to decision makers.
Financial Activities - Answer-Activities that obtain from investors and creditors the cash
needed to launch and sustain the business; a section of the statement of cash flows.
Fixed Assets - Answer-Another name for property, plant, and equipment.
Generally Accepted Accounting Principles (GAAP) - Answer-Accounting guidelines,
formulated by the Financial Accounting Standards Board, that govern how accounting is
practiced.
Historical Cost Principle - Answer-Principle that states that assets and services should
be recorded at their actual cost.
Income Statement - Answer-A financial statement listing an entity's revenues,
expenses, and net income or net loss for a specific period. Also called the statement of
operations.
International Financial Reporting Standards (IFRS) - Answer-Accounting guidelines,
formulated by the International Accounting Standards Board (IASB). By 2014, U.S.
GAAP is expected to be harmonized with IFRS. At that times, U.S. companies are
expected to adopt these principles for their financial statements, so that they can be
compared with those of companies from other countries.
, Investing Activities - Answer-Activites that increase/decrease the long-term assets
available to the business; a section of the statement of Cash flows.
Liability - Answer-An economic obligation (debt) payable to an individual/organization
outside the business.
Limited Liability Company (LLC) - Answer-A business organization in which the
business organization in which the business (not the owner) is liable for the company's
debts.
Long-term Debt - Answer-A liability that falls due beyond one year from the date of the
financial statements.
Management Accounting - Answer-The branch of accounting that generates information
for the internal decision makers of a business, such as top executives.
Merchandise Inventory - Answer-The merchandise that a company sells to customers,
also called inventory.
Net Earnings - Answer-Another name for Net Income.
Net Income - Answer-Excess of total revenues over total expenses.
Net Profit - Answer-Another name for Net Income.
Note Payable - Answer-A liability evidenced by a written promise to make a future
payment.
Operating Activities - Answer-Activities that create revenue/expenses in the entity's
major line of business; a section of the statement of cash flows. These activities affect
the income statement.
Owners' Equity - Answer-The claim of the owners of a business to the business. Also
called capital, stockholders' equity, or net assets.
Paid-in Capital - Answer-The amount of stockholders equity that stockholders have
contributed to the operation. Also called contributed capital.
Partnership - Answer-An association of two or more persons who co-wn business for
profit.
Plant Assets - Answer-Another name for property, plant, and equipment.
Property, plant, and equipment - Answer-Long-lived assets, used in the operation of the
business. Also called plant assets or fixed assets.
