Financial Statements

Key Terms

assets=liabilities+owner's equity

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