Flash cards for all the vocabulary words in the REA Financial Accounting CLEP study guide. Includes all the formulas, and the CLEP Clues in the text. This set is for Chapter 2 - Getting Started. Note: There is no Chapter 1.

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  • Assets

    Economic resources that the business plans to use in the future to make money.

    Balance sheet

    The financial report that shows business assets, liabilities, and owner's equity as of a particular day.

    Balanced books

    When "Where did it go?" equals "Where did it come from?" of when a company's assets equal its liabilities plus the owner's equity.


    Assets that help a business or a person make money.


    When money is changed into another asset that helps the business make money.


    Outsiders to whom the company owes money.

    Current assets

    Assets that can be used to pay current liabilities.

    Current liabilities

    Debts that must be paid within one year or one operating cycle, whichever is longer.

    Financial accounting

    The skill of producing financial statements from business transactions.

    Fiscal year

    The 12-month period a business uses to report the results of its operations.


    All financial statements have a standard 3-line heading as follows:
    Name of the Company
    Name of the Report
    Date (balance sheet) or Period of Time (all other statements)


    Debts owed to people outside of the company.


    The easier it is to change an asset into cash, the more liquid that asset is.

    Operating cycle

    The natural period of time before certain business activities tend to repeat - normally one year.

    Owner's equity

    That portion of the business the owner gets to keep after paying off all creditors.

    Sole proprietor

    The individual owner (without partners) of an unincorporated business.

    Basic accounting equation.

    Assets = Liabilities + Owner's equity
    Owner's equity = Assets - Liabilities
    Liabilities = Assets - Owner's equity

    Business entity

    The financial statements report about a single business. Every business gets it own set of books. Accountants do not mix in the owner's personal financial information.


    "Current" liabilities are those debts that must be paid within one year or one operating cycle, whichever is longer.

    Current ratio

    Current assets
    ------------------------ = Current Ratio
    Current Liabilities

    Debt ratio

    Total liabilities
    ------------------------ = Debt Ratio
    Total assets
    100% - Equity Ratio = Debt Ratio

    Double entry accounting

    Recording business transactions twice: once to show where the money came from, and another time to show where the money went.

    Equity ratio

    Total equity
    ------------------------ = Equity Ratio
    Total assets
    100% - Debt Ratio = Equity Ratio


    Every time you see the word "payable", the CLEP exam is talking about a liability.


    If given one of these ratios (debt or equity) on the CLEP test, subtract that number from 100% to quickly find the other.

    If the debt ratio is 55%, the equity ratio is 100% - 55% = 45%.
    The equity ratio is 45%.

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