Chapter 1 Introducing Financial Statements Flashcards
Define accounting
system that records business transactions into financial statements
relays information to users about business activities to help them make decisions
What is accounting considered?
“Language of business”
Who are external users?
-do not directly run business
Financial accounting
-building the financial statements
ex.
- investors/shareholders
-lenders/creditors (banks)
-government
-customers
-auditors (external)
-vendors/suppliers.manufacturers
Who are internal users?
-do run the business
Managerial Accounting
-making business decisions
ex:
-employees- board of directors, executives>CFO/CEO, managements (controllers/analysts, all employees
- internal auditors
What is ethics?
the study of right from wrong
good vs bad decisions
What is fraud vs. error
Fraud has intent to deceive
Error is accidental
What is on the fraud triangle
- Opportunity-ability exists to commit fraud with low risk of being caught
- Pressures or incentives (personal or business)
- Rationalization- justifying the fraud
What are internal controls?
They help to mitigate (prevent) fraud
ex.
- locks/swipe access required
- passwords/firewalls
- segregation of duties
What is GAAP and what does it stand for?
Generally Accepted Accounting Principles
-US Financial Accounting is governed by GAAP
-Aims to make info relevant, reliable, and consistent/comparable
-SEC has the authority to set GAAP
What does SEC stand for and what did it form?
Securities and Exchange Commission
-formed the FASB- Financial Accounting Standards Board
-FASB sets GAAP and SEC oversees them
What is the IASB?
International Accounting Standards Board
-individuals from various countries
-issues IFRs (International Financial Reporting Standards)
-FASB and IASB work together to make financial info comparable
-trying to minimize the differences between GAAP and IFRS
What are the 4 accounting principles?
- Measurement/Cost Principle
- Revenue Recognition Principle
- Expense Recognition Principle/”Matching Principle”
- Full Disclosure Principle
What is the Measurement/Cost Principle?
-Accounting info is based on actual cost
-All transactions have to have a value
ex. exchanging a building for land
What is the Revenue Recognition Principle?
-Revenue- money earned from selling a good or service
-Recognize revenue when:
1. good or service is provided to customer AND
2. at an amount expected to be received
What is the Expense Recognition Principle/ “Matching Principle?”
-Expense- amount incurred (spent) while trying to earn the revenue
ex. salary, rent, utilities
-Records the expense as it is incurred to generate the revenue (usually in the same accounting period)
What is the Full Disclosure Principle?
-Required to report the details behind the financial statement numbers to help users make better decisions
- called the “footnotes” to the financial statement
What is the basic accounting equation?
Assets= Liabilities + Owners Equity
What are assets?
-Resources that a company owns
-Expect to yield future benefits
-Ex: cash, building, land, equipment, machinery, automobiles, supplies, computers, furniture
-Accounts receivable
What are accounts receivable?
-future inflow of cash
-provided a good/service and did not yet receive the cash
-asset
What are liabilities?
-Things that we owe
- Future obligations to pay
-Good or service was received but not yet paid
-Accounts payable
What are accounts payable?
-future outflow of cash
-future promise to pay for the good or service
-you paid an “amount”/paid with “credit”
-liability
What is owners equity?
-stockholders/shareholders equity
-the claims on the company by its owners
What is owners equity made up of?
contributed capital- the owners invested in the company
retained earnings- earning retained in the company (revenues, expenses, dividends)
What are dividends?
Money paid out to the owners
