Classified financial statements General-purpose external financial statements that are divided into subcategories.

Comparability "The convention of presenting information in a way that enables decision makers to recognize similarities, differences, and trends over different time periods or between different companies."

Conservatism "The convention that when faced with two equally acceptable alternatives, the accountant must choose the one least likely to overstate assets and income."

Consistency "The convention requiring that once an accounting procedure is adopted, it not be changed from one period to the next unless users of the financial statements are informed of the change."

Conventions "Rules of thumb, or general principles, for recording transactions and preparing financial statements."

Cost-benefit The convention that the benefits gained from providing accounting information should be greater than the costs of providing that information.

Cost of goods sold The amount a merchandiser paid for the merchandise it sold during an accounting period or the cost to a manufacturer of making the products it sold during an accounting period. Also called cost of sales.

Current assets "Cash and other assets that are reasonably expected to be converted to cash, sold, or consumed within one year or within a normal operating cycle, whichever is longer."

Current liabilities "Obligations due to be paid or performed within one year or within the normal operating cycle, whichever is longer."

Current ratio A measure of liquidity; current assets divided by current liabilities.






Debt to equity ratio A measure of profitability that shows the relationship of assets financed by creditors to those financed by stockholders; total liabilities divided by stockholders’ equity.






Earnings per share Net income earned on each share of common stock; net income divided by the average number of common shares outstanding during the year. Also called net income per share.






Fraudulent financial reporting The intentional preparation of misleading financial statements.

Freight out expense The cost to the seller of shipping goods to the buyer. Also called delivery expense.

Full disclosure The convention requiring that a company’s financial statements and their notes present all information relevant to the users’ understanding of the statements.






Gross margin The difference between net sales and cost of goods sold. Also called gross profit.

Gross sales Total sales for cash and on credit during an accounting period.






Income before income taxes The amount a company has earned from all activities—operating and nonoperating—before taking into account the amount of income taxes incurred.

Income from operations Gross margin less operating expenses. Also called operating income.

Income taxes "A category for the expense of federal, state, and local taxes that appears only on income statements of corporations. Also called provision for income taxes."

Intangible assets Long-term assets with no physical substance whose value stems from the rights or privileges they extend to their owners.

Investments "Assets, usually long term, that are not used in the normal operation of a business and that management does not intend to convert to cash within the next year."






Liquidity Having enough money on hand to pay bills when they are due and to take care of unexpected needs for cash.

Long-term liabilities Debts that fall due more than one year in the future or beyond the normal operating cycle.






Manufacturing companies Companies that make and sell products.

Materiality The convention that refers to the relative importance of an item or event in a financial statement and its influence on the decisions of the users of financial statements.

Merchandising companies "Companies, including both wholesalers and retailers, that buy and sell products."

Multistep income statement An income statement that goes through a series of steps to arrive at income before income taxes.






Net income "What remains of gross margin after operating expenses are deducted, other revenues and expenses are added or deducted, and income taxes are deducted. Also referred to as the “bottom line.”"

Net sales "The gross proceeds from sales of merchandise, or gross sales, less sales returns and allowances and any discounts allowed. Often simply called sales."






Operating expenses Expenses other than cost of goods sold that are incurred in running a business.

Other assets "A balance sheet category that some companies use to group all assets other than current assets and property, plant, and equipment."

Other revenues and expenses The section of a multistep income statement that includes revenues and expenses not related to business operations. Also called nonoperating revenues and expenses.






Profitability The ability of a business to earn a satisfactory income.

Profit margin A measure of profitability that shows the percentage of each sales dollar that results in net income; net income divided by net sales.






Qualitative characteristics Standards for judging the information that accountants give to decision makers.






Relevance The qualitative characteristic of information that bears directly on the outcome of a decision.

Reliability The qualitative characteristic of information that represents what it is supposed to represent and is verifiable and neutral.

Return on assets A measure of profitability that shows how efficiently a company uses its assets to produce income; net income divided by average total assets.

Return on equity A measure of profitability that relates the amount earned by a business to the stockholders’ investment in the business; net income divided by average stockholders’ equity.






Single-step income statement An income statement that arrives at income before income taxes in a single step.






Understandability The qualitative characteristic of information that communicates an intended meaning.

Usefulness The qualitative characteristic of information that is relevant and reliable.






Working capital A measure of liquidity that shows the net current assets on hand to continue business operations; total current assets minus total current liabilities.