Chapter 2 concepts

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Qualitative characteristic being employed when companies in the same industry are using the same accounting principles.

confirmatory value

Quality of information that confirms users’ earlier expectations.


Imperative for providing comparisons of a company from period to period.


Ignores the economic consequences of a standard or rule.


Requires a high degree of consensus among individuals on a given measurement.


Predictive value is an ingredient of this primary quality of information.

comparability, verifiability, timeliness and understandability

Four qualitative characteristics that are related to both relevance and faithful representation.


An item is not recorded because its effect on income would not change a decision.

faithful representation

Neutrality is an ingredient of this primary quality of accounting information.

relevance and faithful representation

Two primary qualities that make accounting information useful for decision-making purposes.


Issuance of interim reports is an example of what enhancing quality?

gains and losses

Arises from peripheral or incidental transactions.


Obligation to transfer resources arising from a past transaction.

investment by owners and comprehensive income

Increases ownership interest.

distribution to owners

Declares and pays cash dividends to owners.

comprehensive income

Increases in net assets in a period from nonowner sources.


Items characterized by service potential or future economic benefit.

comprehensive income

Equals increase in assets less liabilities during the year, after adding distributions to owners and subtracting investments by owners.

revenues & expenses

Arises from income statement activities that constitute the entity’s ongoing major or central operations.


Residual interest in the assets of the enterprise after deducting its liabilities.


Increases assets during a period through sale of product.

distribution to owners

Decreases assets during the period by purchasing the company’s own stock.

comprehensive income

Includes all changes in equity during the period, except those resulting from investments by owners and distributions to owners.

expense recognition principle

Allocates expenses to revenues in the proper period

historical cost principle

Indicates that fair value changes subsequent to purchase are not recorded in the accounts. (Do not use revenue recognition principle.)

full disclosure principle

Ensures that all relevant financial information is reported.

going concern principle

Rationale why plant assets are not reported at liquidation value. (Do not use historical cost principle.)

economic entity assumption

Indicates that personal and business record keeping should be separately maintained.

periodicity assumption

Separates financial information into time periods for reporting purposes.

industry practices

Permits the use of fair value valuation in certain industries. (Do not use fair value principle.)

monetary unit assumption

Assumes that the dollar is the "measuring stick" used to report on financial performance.

monetary unit assumption

Under current GAAP, inflation is ignored in accounting due to the

economic entity assumption

Parent-subsidiary financials are an example of the ___________ assumption

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