Chapter 1-Accounting In Action Flashcards
(26 cards)
What are the 3 basic accounting activities?
- Identifies the economic events relevant to its business
- Records: a systematic chronological diary of events
- Communicates via reports and statements.
What is the intent of the Sarbanes-Oxley Act (SOX)
To reduce unethical corporate behavior and decrease the likelihood of future corporate scandals.
What are the main results of SOX?
- Top management must certify the accuracy of financial statements.
- Penalties for fraudulent financial activities are more severe.
- Increased the independence requirements of outside auditors.
- Increased oversight role of boards of directors.
What does Generally Accepted accounting principles (GAAP) indicate?
How to report economic events
What is the primary accounting standard setting body in the US?
Financial accounting standards board (FASB)
What does the Securities and exchange commission oversee?
The US financial markets and the accounting standard setting bodies
What is the historical cost principle?
The principle that dictates that companies record assets at their cost (regardless of appreciation)
Fair value principle
Dictates that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability)
Most often used where assets are actively traded (like investment securities)
What is the monetary unit assumption?
It requires that companies include in the accounting records only transaction data that can be expressed in money terms.
What is the economic entity assumption
The requirement that the activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities
The basic accounting equation
Assets =
Liabilities + shareholders equity
Why do liabilities appear first in the basic accounting equation?
Because they are paid first if the business is liquidated
Why increases stockholders equity?
- Investments by stockholders
2. Revenues
What decreases stockholders equity?
- Dividends to stockholders
2. Expenses
What is stockholders equity comprised of?
- Common stock
2. Retained earnings
Retained earnings =
Revenue - Expenses - Dividends
What does the income statement report?
the success or profitability of a company’s operations over a specific period of time.
Alternative terminology for income statement
Statement of operations,
earnings statement,
profit and loss statement
What data is the income statement prepared from?
The revenue and expense columns of the tabular summary (basic accounting equation).
What data does the retained earnings statement come from?
From the retained earnings columns of the tabular summary (basic accounting equation) and from the income statement (add net income).
What does the balance sheet report?
the assets, liabilities, and stockholders equity at a specific date.
What data does the balance sheet come from?
From the assets and liabilities columns on the tabular summary (basic accounting equation) and from the retained earnings statement (final summon the statement added under common stock).
what does the statement of cash flows provide information on?
it provides information on the cash receipts and payments fro a specific period of time.
What does the statement of cash flows report?
- the cash effects of a company’s operations during a period
- it’s investing activities
- its financing activities
- the net increase or decrease in cash for that period of time.
- the cash amount the end of the period.
