Mid key 2 - Key definitions PDF

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Chapter 2 Financial Statements for decision making -

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accounting entity assumption: the assumption that a business entity is separate and distinct from its owners and from other business entities accounting equation an algebraic expression of the equality of assets to liabilities and equity: Assets = Liabilities + Equity accounts payable: amounts owed to creditors for the purchase of merchandise, supplies and services in the normal course of business; also commonly referred to as creditors or trade creditors accounts receivable: amounts due from customers for sale of goods or services performed on credit; also commonly referred to as debtors or trade debtors accrual basis: the effects of transactions and events are recognised in accounting records when they occur, and not when the cash is received or paid assets: resources controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity balance sheet: (statement of financial position) a financial statement listing the assets, liabilities and equity of a business entity as at a specific date company (or corporation): a form of business structure incorporated to operate as a business entity under the Corporations Act 2001 throughout Australia comparability: the quality of financial information that enables users to discern and evaluate similarities and differences between transactions and events, at one time and over time, for one entity or a number of entities consistency: the notion that once a particular accounting policy or procedure is adopted, it should not be changed from period to period unless a different method provides more useful information creditors: people or business entities to whom debts are owed; alternatively, another name for the accounts payable account debtors: people or business entities from whom debts are owed; alternatively, another name for the accounts receivable account double-entry accounting: the accounting system where every transaction affects two (or more) components of the accounting equation drawings: the withdrawal of assets from the business entity by its owner(s) economic substance: accounting transactions and events are reported on the basis of economic reality rather than legal form effectiveness: a measure of how well an entity attains its goals efficiency: maintaining a satisfactory relationship between an entity’s resource inputs and its outputs of products or services equity: the residual interest in the assets of the entity after deducting all its liabilities expenses: decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants faithful representation: to be useful to the main user group in making resource allocation decisions, information must be a faithful representation of the real-world economic phenomena that it purports to represent. This requires information to be verifiable, neutral and complete. financial performance: the ability of an entity to utilise its assets efficiently and effectively to generate cash flows in the conduct of its activities, whether for profit or not for profit financial position: the economic condition of a reporting entity, with regard to its control over economic resources, financial structure, capacity for adaptation, and solvency

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financing activities: activities relating to the raising of funds for an entity to carry out its operating and investing activities, i.e. equity and borrowings that are not part of the definition of cash going concern assumption: the assumption that a business will continue to operate in the future unless there is evidence to the contrary income: increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants; includes revenues and gains income statement (or profit or loss statement or operating statement ) a financial statement listing the income, expenses and profit/operating surplus or loss/deficit of an entity for a certain time period investing activities: activities associated with the acquisition and sale of an entity’s noncurrent assets, and with the purchasing and selling of investments (e.g. shares) that are not part of the definition of cash liabilities: present obligations of an entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits limited liability: in a company, shareholders are liable to contribute to the assets of a company only to the extent of amounts unpaid on their shares loss: the excess of expenses over total income (revenues and gains) management by exception: the concentration only on performance results that deviate significantly from those planned management functions: the planning, organising, directing and controlling required to manage an organisation materiality: the extent to which information can be omitted, misstated or grouped with other information without misleading the users of that information when they are making their economic decisions net assets: total assets minus total liabilities (as in the narrative form of the balance sheet / statement of financial position) operating activities: activities associated with the provision of an entity’s goods or services, and other activities that are neither financing nor investing activities organisation: a group of people who share common goals with a well-defined division of labour partnership: a form of business structure under which a business entity is owned by two or more people as partners sharing profits and losses period assumption: the assumption that the economic life of an entity can be divided into arbitrary equal time intervals for reporting purposes profit: when total income (revenues and gains) exceeds total expenses relevance: a quality of financial information that influences economic decisions by helping users to form predictions, to confirm or correct past evaluations and to assess the rendering of accountability by preparers shareholders: persons or entities owning shares in a company single proprietorship: (sole trader) a form of business structure in which the business entity is owned by an individual statement of cash flows: a financial statement that reports the cash flows in and out of an entity. The cash flows are classified into operating, investing and financing activities timeliness: information must be available to decision makers before it loses its capacity to influence decisions, i.e. before the information loses its relevance

- understandability: does not necessarily mean simplicity. It is assumed that readers of reports have a reasonable knowledge of business and economic activities and accounting, and that they are willing to study the information with reasonable diligence. - verifiability: that quality of information whereby different independent observers would reach general agreement that a particular piece of information represents the economic phenomena that it purports to represent without material error or bias, or that the measurement method used has been applied without material error or bias...