CLEP Financial Accounting flashcards
CLEP Financial Accounting · Build recall with a focused review session.
33 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Accounting Equation
- Assets equal liabilities plus stockholders' equity. Every recorded transaction keeps this equality intact, forming the foundation for the balance sheet and double-entry bookkeeping.
- Double-Entry System
- Each transaction is recorded with equal total debits and credits. This ensures the accounting equation stays balanced and the trial balance totals agree.
- Accrual Basis Accounting
- Revenues are recorded when earned and expenses when incurred, regardless of when cash changes hands. It differs from cash-basis accounting, which records only cash movements.
- Matching Principle
- Expenses are recognized in the same accounting period as the revenues they helped produce. This links costs to benefits and supports accurate periodic income measurement.
- Revenue Recognition Principle
- Revenue is recorded when the performance obligation is satisfied and collection is reasonably assured, not necessarily when cash is received.
- Normal Account Balance
- The side (debit or credit) that increases an account. Assets and expenses are debit-normal; liabilities, equity, and revenues are credit-normal.
- Trial Balance
- A listing of all ledger account balances at a point in time. Total debits must equal total credits, helping detect posting and arithmetic errors.
- Multi-Step Income Statement
- A format separating gross profit, operating income, and net income. It shows sales minus cost of goods sold, then operating expenses, then non-operating items and taxes.
- Gross Profit
- Net sales minus cost of goods sold. It represents the amount available to cover operating expenses and contribute to net income.
- Cost of Goods Sold
- The cost of inventory sold during the period. Under periodic inventory it equals beginning inventory plus purchases minus ending inventory.
- Gross Profit Margin
- Gross profit divided by net sales, expressed as a percentage. It measures how much of each sales dollar remains after inventory cost.
- Operating Income
- Gross profit minus operating expenses such as selling and administrative costs. It excludes interest, gains/losses, and income taxes.
- Net Income
- Total revenues minus total expenses, including taxes. It increases retained earnings and appears on the statement of retained earnings.
- Earnings Per Share
- Net income minus preferred dividends, divided by weighted-average common shares outstanding. It reports profit attributable to each common share.
- Closing Entries
- Entries that zero out temporary accounts (revenues, expenses, dividends) and transfer their balances to retained earnings at period end.
- Classified Balance Sheet
- A balance sheet grouping items as current assets, long-term assets, current liabilities, long-term liabilities, and equity. It aids liquidity and solvency analysis.
- Current Assets
- Cash and assets expected to be converted to cash or used within one year or the operating cycle, whichever is longer.
- Current Ratio
- Current assets divided by current liabilities. It measures a company's ability to pay short-term obligations as they come due.
- Working Capital
- Current assets minus current liabilities. A positive amount indicates short-term obligations are covered by short-term resources.
- Straight-Line Depreciation
- (Cost minus salvage value) divided by useful life. It allocates an equal depreciation expense to each year of the asset's service life.
- Accumulated Depreciation
- A contra-asset account holding total depreciation recorded to date. It is subtracted from asset cost to yield book value on the balance sheet.
- Book Value
- An asset's cost minus its accumulated depreciation. It reflects the unexpired cost remaining on the balance sheet, not market value.
- Retained Earnings
- Cumulative net income retained in the business, less dividends declared. It equals beginning retained earnings plus net income minus dividends.
- Operating Activities
- Cash flows from core business operations, including cash received from customers and cash paid to suppliers and employees.
- Investing Activities
- Cash flows from acquiring or disposing of long-term assets and investments, such as property, equipment, and securities.
- Financing Activities
- Cash flows from transactions with owners and creditors, including issuing stock, borrowing, repaying debt, and paying dividends.
- Indirect Method
- A cash flow presentation starting with net income, adding back noncash expenses like depreciation, and adjusting for changes in working-capital accounts.
- Noncash Expenses
- Expenses that reduce net income without using cash, such as depreciation and amortization. They are added back under the indirect method.
- Quick Ratio
- Cash plus marketable securities plus receivables, divided by current liabilities. It excludes inventory and measures immediate liquidity.
- Inventory Turnover
- Cost of goods sold divided by average inventory. It indicates how many times inventory is sold and replaced during a period.
- Return on Equity
- Net income divided by average stockholders' equity. It measures how effectively equity investment generates profit.
- Segregation of Duties
- An internal control principle separating authorization, custody, and recording of assets so no single person controls a transaction end to end.
- Bank Reconciliation
- A schedule reconciling the bank statement balance and the book cash balance by adjusting for outstanding checks, deposits in transit, fees, and errors.