Chapter 1 (Wygt) Flashcards
(172 cards)
1
Q
Define accounting?
A
> Accounting is the system that identifies, records, and communicates the economic events of an organization to a wide variety of interested users.
> Accounting is the system that provides relevant, reliable financial information. Let’s examine accounting activities in more detail.
2
Q
What is a starting point to the accounting process?
A
> As a starting point to the accounting process, a company identifies the economic events relevant to its business.
3
Q
Provide some examples of economic events that are relevant to a companies’ business:
A
> are the sale of apparel and accessories by Aritzia Inc
> the sale of coffee and doughnuts by Tim Hortons,
> and the payment of wages by Rogers Communications.
4
Q
Once a company identifies economic events, what do they do next?
A
> Once a company like Aritzia identifies economic events, it records those events in order to provide a history of its financial activities.
5
Q
What does recording consist of in accounting?
A
> Recording consists of keeping a systematic, chronological diary of events, measured in dollars and cents.
6
Q
What does recording allow a company to do?
A
> The systematic collection of these data allows Aritzia to prepare financial statements that are then used to communicate financial information to interested users
7
Q
How do accountants communicate financial information?
A
> financial statements
8
Q
What do financial statements report?
A
> Financial statements report the recorded data in a standardized way to make the information meaningful.
9
Q
In what way should the data be presented in a financial statement?
A
> Such data are said to be reported in the aggregate. By presenting the recorded data in the aggregate, the accounting process simplifies the multitude of transactions and makes a series of economic events understandable and meaningful.
10
Q
A vital element in communicating economic events is the accountant’s ability to do what?
A
> ability to analyze and interpret the reported information.
11
Q
What is analysis?
A
> Analysis involves using ratios, percentages, and data visualization (graphs and charts) to highlight significant financial trends and relationships.
12
Q
What is interpretation?
A
> Interpretation involves explaining the uses, meaning, and limitations of reported data.
13
Q
Summarize the activities of the accounting process:
A
1) Identification - select economic events (Transactions)
2) Recording - record, classify, and summarize
3) Communication - prepare accounting reports
4) Analyze and interpret for users
14
Q
What function does the accounting process include?
A
> The accounting process includes the bookkeeping function.
15
Q
What does bookkeeping usually involve?
A
> The accounting process includes the bookkeeping function.
16
Q
What is financial literacy?
A
> financial literacy—the ability to understand and manage your finances.
17
Q
There are two broad groups of users of accounting information: what are they?
A
Internal users and external users.
18
Q
Internal users of accounting information do what? What are they in relation to the company?
A
> plan, organize, and run companies.
> They work for the company. They include finance directors, marketing managers, human resources personnel, production supervisors, and company officers.
19
Q
Some examples of information that internal users need include:
A
- forecasts of cash flows for the next year,
- projections of profit from new sales campaigns,
- analyses of salary costs, and
- budgeted financial statements.
20
Q
Internal users generally have direct access to what?
A
> Internal users generally have direct access to
21
Q
What are external users in accounting?
A
> External users are individuals or organizations outside of a company who want financial information about the company.
22
Q
There are several types of external users in accounting, but which two are the most common?
A
1) Investors
2) Creditors
23
Q
What are investors?
A
- Investors, who are owners—or potential owners—of the business, use accounting information to make decisions to buy, hold, or sell their ownership interest.
24
Q
What are creditors?
A
- Creditors—persons or other businesses that are owed money by the business, such as suppliers and bankers—use accounting information to evaluate the risks of granting credit or lending money.
25
Some examples of other external users and their information needs are the following:
1) Labour unions want to know whether the owners can afford to pay increased salaries and benefits to their members.
2) Customers are interested in whether a company will continue to honour its product warranties and support its product lines.
3) Taxing authorities, such as the Canada Revenue Agency, want to know whether the company respects the tax laws.
4) Regulatory agencies, such as provincial securities commissions that regulate companies that sell shares to the public, want to know whether the company is respecting established rules.
5) Economic planners use accounting information to forecast economic activity.
26
What are some questions that are asked by Internal users?
1) Finance - is there enough cash to pay the bills?
2) Marketing - What price should we sell our smart phones to maximize profits?
3) HR- how many people can we afford to hire this year?
4) Production - what product line is the most profitable?
27
What are some questions asked by external users?
1) Investors - is the company earning enough to give me a return on my investment?
2) Creditors - does the company generate enough cash flow to pay me the amounts I am owed?
3) Labour unions - can the company afford to increase our members' benefits?
4) Customers - will the company stay in business long enough to service the products I buy from it?
28
Unlike internal users, external users have access to information in what way?
> have access to only the accounting information available publicly and/or provided to them by the business.
29
What is the focus of financial accounting?
> have access to only the accounting information available publicly and/or provided to them by the business.
30
Computerized accounting information systems collect what kind of information?
> collect vast amounts of data about the economic events in a company and about the parties with whom the company engages, such as suppliers and customers.
31
Business decision-makers take advantage of this wealth of data generated from computerized accounting to do what?
> take advantage of this wealth of data by using data analytics to make more informed business decisions.
> this has become increasingly common
32
What is data analytics?
> involves analyzing data, often employing both software and statistics, to draw inferences.
33
How can "big data" improve decision making?
> Companies analyze the large amount of data now available to improve cost estimation for future projects and to identify bottlenecks and opportunities to increase the efficiency of the production process.
34
The main objective of financial reporting is to do what?
> The main objective of financial reporting is to provide useful information to existing and potential investors and creditors (external users) to make decisions about providing resources to a business.
35
To make the decision to invest in a business or to lend to a business, users need information about what?
the business’s ability to earn a profit and generate cash.
36
Financial statements must give information about the following 4 components:
1) The business’s economic resources. What resources does the business have that it can use to carry out its business activities?
2) The claims to the business’s economic resources. What are the amounts owed by the business and the owner’s rights to the business’s resources?
3) Economic performance. Is the business generating a profit and enough cash to pay its debts, and provide a return to its owners?
4) Management’s stewardship. Is management using the economic resources efficiently and effectively in order to provide future net cash flows?
37
What affects how a financial statement is prepared?
> Depends on the form and nature of the business organization.
38
What is a proprietorship?
> A business owned by one person is a proprietorship.
> The owner is usually the operator of the business. Small service businesses (hair stylists, plumbers, and mechanics), farms, and small retail stores (antique shops, corner grocery stores, and independent bookstores) are often proprietorships.
39
Under proprietorship, what is unlimited liability?
> The owner (the proprietor) receives any profits, suffers any losses, and is personally liable (responsible) for all debts of the business. This is known as unlimited liability.
40
What are four components to proprietorship?
1) Often only a relatively small amount of money (capital) is needed to start in business as a proprietorship.
2) The owner (the proprietor) receives any profits, suffers any losses, and is personally liable (responsible) for all debts of the business. (unlimited liability)
3) There is no legal distinction between the business as an economic unit and the owner. Thus the life of a proprietorship is limited to the life of the owner. This also means that the profits of the business are reported and taxed on the owner’s personal income tax return.
4) For accounting purposes, the records of the proprietorship’s business activities are kept separate from the personal records and activities of the owner.
41
What is a partnership?
> A business owned by two or more persons who are associated as partners is a partnership.
42
How is a partnership similar to a proprietorship?
> In most aspects, a partnership is similar to a proprietorship, except that there is more than one owner.
43
What kind of businesses do partnerships tend to be?
> Partnerships are often used to organize service-type businesses, including professional practices (lawyers, doctors, architects, and accountants).
44
What are the four components of partnerships?
1) Typically, a partnership agreement (written or oral) defines the initial investments of each partner, the duties of each partner, how profit (or loss) will be divided, and what the settlement will be if a partner dies or withdraws.
2) As in a proprietorship, for accounting purposes a partnership’s business activities must be kept separate from the personal activities of each partner.
3) The partners’ share of the profit must be reported and taxed on the partners’ personal income tax returns.
4) Each partner generally has unlimited liability for all debts of the partnership, even if one of the other partners created the debt. This means that any of the partners can be forced to give up his or her personal assets in order to repay the partnership debt, just as can happen to an owner in a proprietorship.
45
What is a corporation?
> A business that is organized (incorporated) as a separate legal entity under federal, provincial, or territorial corporate law is a corporation
46
Under a corporation, what is limited liability?
> Limited liability mean shareholders are not personally liable for the debts of the corporation and they risk losing only the amount that they have invested in the company’s shares.
47
What are the four components of a corporation?
1) A corporation can have one owner or many owners. A corporation’s ownership is divided into transferable shares. Shareholders, also known as investors, may sell all or part of their shares to other investors at any time. Easy changes of ownership are part of what makes it attractive to invest in a corporation.
2) A corporation enjoys an unlimited life, because ownership can be transferred through the sale of shares and without dissolving the corporation.
3) The corporation’s separate legal status provides the owners of the shares (shareholders) with limited liability. Limited liability mean shareholders are not personally liable for the debts of the corporation and they risk losing only the amount that they have invested in the company’s shares.
4) A corporation is responsible for its own debts and for paying taxes on its profit.
48
Public corporations commonly distribute their financial statements to which groups and when?
> Public corporations commonly distribute their financial statements to
49
How do private corporations differ from public corporations?
> Private corporations do not issue publicly traded shares.
50
What are the 6 characteristics of proprietorships?
1) owners
2) owner's liability
3) private or public
4) taxation of profits
5) life of organization
6) If it is a separate legal entity from its owners.
1) proprietor: one
2) unlimited
3) private
4) paid by the owner
5) limited
6) not seperate from it's owner
51
What are the 6 characteristics of partnerships?
1) owners
2) owner's liability
3) private or public
4) taxation of profits
5) life of organization
6) If it is a separate legal entity from its owners.
1) partners - 2 or more
2) Unlimited
3) usually private
4) paid by the partners
5) limited
6) not separate from its' owner
52
What are the 6 characteristics of corporations?
1) owners
2) owner's liability
3) private or public
4) taxation of profits
5) life of organization
6) If it is a separate legal entity from its owners.
1) Shareholders - 1 or more
2) Limited
3) Private or public
4) Paid by the corporation
5) Unlimited
6) separate from its' owners
53
In order to prepare useful financial information, the accounting profession has developed standards that are generally accepted and universally practised. What is this set of standards called?
This common set of standards is called generally accepted accounting principles (GAAP).
54
Generally accepted accounting principles do what?
> represent broad principles, procedures, concepts, and standards that act as guidelines for accountants.
> guide the reporting of economic events.
55
For GAAP standards to be meaningful, what needs to be present?
> However, for these standards to be meaningful, a fundamental business concept must be present—ethical behaviour.
56
What are ethics?
> The standards of conduct by which actions are judged as right or wrong, honest or dishonest, fair or not fair are ethics.
57
Fortunately, most individuals in business are ethical, that is:
> Their actions are both legal and responsible.
> They consider the organization’s interests when they make decisions.
> most business now have codes of conduct to follow to ensure proper ethics
58
What are the steps used to analyze ethics cases and situations?
1) Identify the ethical issues involved. (consult the code of conduct)
2) Identify the stakeholders—the persons or groups that may benefit or face harm (who are the impacted parties and what are their responsibilities?)
3) Consider the alternative courses of action and the consequences of each for the various stakeholders. (there may be many - pick the most ethical)
59
What are some of the ways in which fraud can occur?
> Workplace fraud can take many forms. It could be an employee forging a cheque or stealing inventory. But it could also be an executive who falsifies financial information to make their department’s sales figure look better, to meet company targets and collect a bonus, or to keep their job.
60
How do companies send the message that they don't tolerate fraud and what to do when it is suspected:
> One way of doing that is to protect and encourage employees who suspect fraud and report it to their employers.
> The federal government and most provinces in Canada have enacted their own public employee protection legislation.
> Another way to discourage fraud is to set up an internal crime hotline for employees to report suspected wrongdoing.
61
What is the conceptual framework of accounting?
> is a coherent system that guides the development and application of accounting principles and standards and leads to the objective of financial reporting.
62
List the components of the conceptual framework of accounting from the bottom up:
> foundation concepts and assumptions
> recognition and measurement
> qualitative characteristics
> elements of the financial statements
> objective of financial reporting
63
Fundamental qualitative characteristics include:
> relevance and faithful representation
64
Accounting information has relevance if it would:
> if it would make a difference in a business decision.
65
What does faithful representation mean?
> faithful representation means that information accurately depicts what really happened.
66
To provide a faithful representation, information must be:
> complete (nothing important has been omitted),
> neutral (it is not biased toward one position or another), and
> free from error.
67
Enhancing qualitative characteristics include:
> comparability, verifiability, timeliness, and understandability.
68
In accounting, comparability results when:
> results when different companies use the same accounting principles.
> Comparability also implies that the accounting information should be consistent.
69
What is Consistency
> Consistency means that a company uses the same accounting principles and methods from year to year.
70
Information has the quality of verifiability if:
> if independent observers, using the same methods, obtain similar results.
71
For accounting information to have relevance, it must be timely. This is referred to as what?
> This is referred to as timeliness and it means information must be available to decision-makers before it loses its capacity to influence decisions.
72
Information has the quality of understandability if it is:
> presented in a clear and concise fashion, so that reasonably informed users of that information can interpret it and comprehend its meaning.
73
Are all events recorded and reported in financial statements? If not, what events are?
> Not all events are recorded and reported in the financial statements.
> Only events that cause changes in the business’s economic resources or changes to the claims on those resources are recorded and reported - These events are called accounting transactions -
74
What is recognition?
> Recognition is the process of recording transactions in the accounting records.
75
A key recognition principle is:
> A key recognition principle is the revenue recognition principle
76
What is performance obligation?
> When a company agrees to perform a service or sell a product to a customer, it has a performance obligation.
77
When the company meets this performance obligation, it recognizes what?
> revenue
78
Therefore, companies recognize revenue in the accounting period when?
> Therefore, companies recognize revenue in the accounting period in which the performance obligation is satisfied, not when cash is exchanged.
79
Recognizing revenue upon performance obligation gives rise to what?
> This then gives rise to what is traditionally known as the matching concept, which often drives when we recognize certain costs incurred to operate the business (known as expenses and discussed later in the chapter).
> Generally, when there is a direct association between the costs incurred and the completion of a performance obligation, accounting attempts to match these costs and revenues.
80
What is measurement? When is something first measured and how?
> Measurement is the process of determining the amount that should be recognized.
> At the time something is acquired, the transaction is first measured at the amount of cash that was paid or will be paid or at the value exchanged.
81
What is the primary basis of measurement used in financial statements? What is the other name for this?
> Historical cost is the primary basis of measurement used in financial statements
> The historical cost measurement method is also known as the cost measurement method.
82
Historical cost has important advantages over other measurement methods: give three.
> It is definite and verifiable. The values exchanged at the time something is acquired can be objectively measured.
> Users can rely on the information that is supplied, because they know it is based on fact.
> Historical cost is relevant if a business is going to operate into the foreseeable future and the resource will continue to be used in the business. We can ask the question, “what did the company give up to acquire the resource to use in the business?”
83
What is fair value, generally?
> Fair value generally would be the amount the resource could be sold for in the market.
84
Only what types of transactions can be reliably expressed in accounting records? What is this traditionally known as?
> only transactions that can be reliably expressed as an amount of money can be included in the accounting records.
> This is traditionally known as the monetary unit concept.
85
Does the monetary unit concept prevent some information from being recorded or included in accounting records?
> the monetary unit concept does prevent some relevant information from being included in the accounting records. For example, the health of the owner, the quality of service, and the morale of employees would not be included, because they cannot be reliably quantified in monetary amounts.
86
What does the monetary unit concept make possible?
> This concept makes it possible for accounting to quantify (measure) economic events.
87
In summary, a transaction is recognized in the accounting records if there is:
> if there is a change in the business’s economic resources or a change to the claims on those resources and the change can be reliably measured in monetary terms.
88
What is reporting/economic entity?
> is defined as an entity that is required, or chooses, to prepare financial statements
- A reporting entity is also referred to as an economic entity.
89
What are two key components to a reporting/economic entity?
> A reporting entity can be any organization or unit in society, that is, it does not have to be a legal entity.
> Financial statements should include information that is both relevant and faithfully represented.
90
What does the recording/economic entity practice guide?
> In practice, this concept guides businesses to record and report a business’s economic activities separate and apart from the economic activities of its owner(s) and all other reporting entities.
91
What is the going concern assumption? It is also referred to as what?
> The going concern assumption (see Alternative Terminology) is the assumption that the reporting entity will continue to operate in the foreseeable future.
> The going concern assumption presumes that the company will operate long enough to use its resources for their intended purpose and to complete the company’s commitments.
> also referred to as: continuity assumption.
92
Why is the going concern assumption one of the most important assumptions in GAAP?
> This assumption is one of the most important assumptions in GAAP because:
- it has implications regarding what information is useful for decision-makers, and
- it affects many of the accounting standards you will learn.
93
If a company is a going concern, then what occurs?
> If a company is a going concern, then financial statement users will find it useful for the company to report certain resources, such as land, at their cost.
- Land is acquired so a company can use it, not so it can be resold - Therefore, what matters is the amount the company gave up to acquire the land, not an estimate of its current value.
94
If a company is not a going concern what happens?
> If a company is not a going concern, and the land is going to be sold, then financial statement users will be more interested in the land’s current value.
95
Does the going concern needs to be included on financial statements?
> If a company is not regarded as a going concern, or if there are significant doubts about its ability to continue as a going concern, then this must be stated in the financial statements, along with the reason why the company is not regarded as a going concern.
> Otherwise, you can assume that the company is a going concern—even though this is not explicitly stated.
96
What is The periodicity concept / time period concept? What are the most common time periods?
> The periodicity concept/time period concept guides businesses in dividing up their economic activities into distinct time periods.
> The most common time periods are months, quarters, and years.
97
To make the information in financial statements meaningful, accountants have to prepare the reports in what way?
> a standardized way
98
standards are developed from what?
> standards are developed from the guiding principles, assumptions, and concepts.
99
What do standards specify?
> Standards specify how to report economic events
100
Accounting standards are part of the body of knowledge known as ?
> known as generally accepted accounting principles (GAAP).
101
In accounting, there are two types of economic events:
(1) external events are transactions with another company; and
(2) internal events occur within a company, such as the use of equipment in operations.
102
In Canada, what is the Accounting Standards Board (AcSB)?
> In Canada, the Accounting Standards Board (AcSB), an independent standard-setting body, has the main responsibility for developing GAAP.
103
What is the AcSB's most important criterion for accounting standards?
> The AcSB’s most important criterion for accounting standards is this: the standard should lead to external users having the most useful financial information possible when they are making business decisions.
104
In Canada, accounting professionals follow different accounting standards - what do For-profit entities report their standards on?
For-profit entities report their financial statements using either
(1) International Financial Reporting Standards (IFRS) or
(2) Accounting Standards for Private Enterprises (ASPE).
105
What are the International Financial Reporting Standards (IFRS)?
> International Financial Reporting Standards (IFRS) are a set of global standards developed by the International Accounting Standards Board (IASB) and adopted for use in Canada by the AcSB.
106
What is the IASB responsible for?
> The IASB is charged with the responsibility to develop International Financial Reporting Standards that bring transparency, accountability, and efficiency to financial markets around the world.
107
What is the IFRS responsible for?
> IFRS makes it easier for users to compare financial information prepared across the globe.
> Therefore, in order to increase comparability, in recent years, more and more countries are adopting IFRS.
108
In Canada, IFRS standards must be followed by what group?
> must be followed by publicly accountable enterprises
109
Publicly accountable enterprises include:
> Publicly accountable enterprises include publicly traded corporations, as well as securities brokers and dealers, banks, and credit unions whose role is to hold assets for the public as part of their primary businesses.
110
What does enterprise mean?
> The word “enterprise” means that the accounting standard applies to the different forms of business organization, as well as specific projects
111
The AcSB recognized that, for most private companies in Canada, users can generally do what and therefore require what for their financial statements? What developed as a result of this?
> The AcSB recognized that, for most private companies in Canada, users can generally obtain additional information from the company if required. Therefore, these users typically require less information in the financial statements.
> As a result, the AcSB developed Accounting Standards for Private Enterprises (ASPE).
112
Non-publicly traded companies can choose to use what standards?
> Non-publicly traded companies can choose to use ASPE instead of IFRS.
113
Because proprietorships and partnerships are private companies, these entities will generally follow what standards for reporting?
ASPE
114
While both IFRS and ASPE are “principle based” (designed to encourage the use of professional judgement in applying basic accounting principles), there are differences. Therefore, what has to be included in a financial statement?
> Therefore, financial statement users will need to know which standards the company is following.
115
Is GAAP static?
> no, it changes over time.
> Standard setters continue to develop new GAAP and modify existing GAAP.
116
The accounting model can be described as a structure that is used to prepare financial statements. The model includes:
> The elements of the financial statements
> The accounting equation
117
There are four financial statements that are prepared for most businesses:
1) Balance sheet
2) Income statement
3) Statement of owner’s equity, and
4) Cash flow statement
118
All business prepare what two financial statements?
> a balance sheet and income statement.
119
What is an account and what should you consider about them in reference to financial statements?
> An account is an individual accounting record of increases and decreases in a specific asset, liability, or owner’s equity item.
> Accounting records are made up of several accounts that group similar transactions, each one given a title such as Owner’s Capital or Utilities Expense.
120
What is a balance sheet? What is another name for this?
> The balance sheet is like a snapshot of the company’s financial condition at a specific point in time (usually the end of a month, quarter, or year)
> sometimes called the statement of financial position.
121
What are assets?
> Assets are present economic resources controlled by a business as a result of past events and have the potential to produce economic benefit.
122
Assets are used to carry out activities, such as :
> such as the production and distribution of merchandise.
123
Some common assets include:
> Accounts receivable
> Prepaid expenses
> Merchandise held for resale (commonly referred to as merchandise inventory).
> Investments.
> Land.
> Buildings.
> Patents.
> Copyrights.
124
What is an accounts receivable?
> is the asset created when a company sells goods or services to customers who promise to pay cash in the future.
125
What is a pre-paid expense?
> is the asset created when a business pays cash in advance for goods or services that will be used over time.
126
Common types of prepaid expenses are :
> insurance, rent, and supplies.
127
What are liabilites?
> Liabilities are claims to economic resources and are defined as present obligations, arising from past events, the settlement of which will include the transfer of economic resources
128
An obligation is:
> duty or responsibility that a company has no practical ability to avoid.
129
What are common liability accounts:
> Accounts payable is an obligation to pay cash to suppliers in the future.
> Notes payable arise when a business borrows money to purchase equipment, for instance. A note payable is supported by a written promise to pay a specific amount, at a specific time, in the future.
> Unearned revenue arises when a customer pays a business in advance of being provided with a service or product. This advance by the customer is a liability because the business has an obligation to provide the service or product in the future.
> Salaries or wages payable to employees.
> Goods and Services Tax or Harmonized Sales Tax (GST/HST) payable and Provincial Sales Tax (PST) payable are obligations to the federal and provincial governments, respectively.
> Property taxes payable is an obligation to the municipality.
130
The law requires that creditor claims be paid before what claims?
> The law requires that creditor claims be paid before ownership claims are paid.
131
What is owner's equity?
> The owner’s claim on the assets of the company is known as owner’s equity.
132
What are three things to note about owner's equity?
> It is equal to total assets minus total liabilities.
> Claims of creditors must be paid before ownership claims; consequently, the owner’s equity is often called “residual equity.”
> If the equity is negative—that is, if total liabilities are more than total assets—the term “owner’s deficiency” (or deficit) describes the shortage.
> Owner’s equity is a general accounting term that could be used for any type of organization. It is used most frequently for proprietorships.
133
What are some examples of assets?
> Accounts receivableMerchandise inventoryVehiclesBuildings
134
what are some examples of liability?
> Accounts payableNotes payableSalaries or wages payable
135
What is an example of owner's equity?
> owners capital
136
The relationship between assets, liabilities, and owner’s equity is expressed as an equation, called what? Who does it apply to?
> the accounting equation
> The accounting equation is sometimes referred to as the balance sheet equation.
> assets = liabilities + owner's equity (claims to economic resources)
> The accounting equation is the same for all businesses regardless of size, nature of business, or form of business organization.
137
What are the two assumptions that most be considered with the accounting equation?
1) Assets must equal the sum of liabilities and owner’s equity.
2) Liabilities are shown before owner’s equity in the accounting equation because creditors have the right to receive payment before owners.
138
What is the main purpose of an income statement?
> The main purpose of the income statement is to report the economic performance of the business’s operations over a specified period of time (a month, quarter, or year).
> The income statement is sometimes called the statement of earnings or statement of operations.
139
Profit or loss is measured by
> is measured by the difference between revenues and expenses
> Profit is sometimes called net income or earnings or net earnings.
140
Profit results when:
> revenues are greater than expenses.
141
Loss results when:
> expenses are greater than revenues.
142
Revenues and expenses are:
> elements of the financial statements and are reported in the income statement along with profit or loss.
143
Revenues result from and result in:
> result from business activities that are undertaken to earn profit, such as performing services, selling merchandise inventory, renting property, and lending money.
> Revenues result in an increase in an asset or a decrease in a liability and an increase in owner’s equity.
144
Revenues come from different sources and are given different names, depending on the type of business. Common types of revenue include:
> Sales revenue
> Service revenue
> Commissions revenue
> Interest revenue
> Rental revenue
145
Expenses are:
> the costs of assets that are consumed and services that are used in a company’s business activities. Expenses are decreases in assets or increases in liabilities and result in a decrease in owner’s equity.
146
Expenses come from different sources and are given different names, depending on the type of business. Common types of expenses include:
> Bank charges expense
> Supplies expense
> Cellphone expense
147
The balance sheet and income statement report balances for all of the elements of the financial statements:
> assets, liabilities, equity, revenue, and expense.
148
The statement of owner’s equity reports what? when does owner's equity increase?
> The statement of owner’s equity reports the changes in owner’s equity for the same period of time as the income statement.
> In a proprietorship, owner’s equity is increased by investments made by the owner and decreased by withdrawals made by the owner.
> owner’s equity is also increased when a business generates a profit from business activities or decreased if the business has a loss.
149
Investments by the owner are what and what do they result in?
> are contributions of cash or other assets (e.g., a vehicle or computer) made by the owner to the business. In a proprietorship, investments are recorded as increases to what is known as the Owner’s Capital account.
> investments by owners result in an increase in an asset and an increase in owner’s equity.
150
An owner may withdraw cash (or other assets) for personal use. In a proprietorship, these withdrawals could be recorded as a direct decrease to the Owner’s Capital account. However, it is generally considered better to use a separate account known as what and what do they result in?
> drawings so that the total withdrawals for a specific period can be determined.
> Drawings result in a decrease in an asset and a decrease in owner’s equity.
151
What does the cash flow statement do?
The cash flow statement (see Alternative Terminology) gives information about the cash receipts and cash payments for a specific period of time.
152
To help investors, creditors, and others analyze a company’s cash, the cash flow statement reports the following:
1) the cash inflows and outflows as a result of the company’s operating activities during a period;
2) the cash inflows and outflows from investing transactions (e.g., the purchase and sale of land, buildings, and equipment);
3) the cash inflows and outflows from financing transactions (e.g., borrowing and repayments of debt, and investments and withdrawals by the owner);
4) the net increase or decrease in cash during the period; and
5) the cash amount at the end of the period.
153
Accounting for assets, liabilities, revenues, and expenses is the same, regardless of the form of business organization. The main distinction between the forms of organizations is found in:
> the terminology that is used to name the equity section,
> the accounting for the owner’s investments and withdrawals,
> and the name of the statement showing the changes in owner’s equity.
154
How is equity summarized in a proprietorship and a partnership?
> In a proprietorship, equity is summarized and reported as one line item on the balance sheet called “capital” and prefaced by the owner’s name.
> In a partnership, equity is summarized and reported as one line item for each partner and each account is referred to as “capital” prefaced by the individual partner’s name.
155
How do you calculate owner's equity?
Owner's capital (investments) - drawings + profit or loss
156
How to calculate profit or loss:
revenues - expenses
157
Key concepts of the expanded accounting equation:
> Assets must equal liabilities plus owner’s equity.
> If revenue increases, owner’s equity increases and either assets increase or liabilities decrease to keep the equation balanced.
> If expenses increase, owner’s equity decreases and either assets decrease or liabilities increase to keep the equation balanced.
158
The system of collecting and processing transaction data and communicating financial information to decision-makers is known as:
> The system of collecting and processing transaction data and communicating financial information to decision-makers is known as
159
Factors that shape an accounting information system include:
> the nature of the company’s business, the types of transactions, the size of the company, the volume of data, and the information demands of management and others.
160
Once it has been determined that an event or transaction should be recognized, it must be analyzed for its effect on the elements of the accounting equation before it can be recorded.
This analysis identifies what two things:
> identifies the specific accounts that are affected, and
> identifies the amount of change in each account.
161
Each transaction must have what kind of effect on the equation for the two sides of the accounting equation to remain equal?
> a dual effect on the equation for the two sides of the accounting equation to remain equal.
162
For example, if an asset is increased, there must be a corresponding (display the dual effect)
> decrease in another asset, or
> increase in a liability, or
> increase in owner’s equity.
163
Each transaction must be analyzed for its effects on:
> the three elements (assets, liabilities, and owner’s equity) of the accounting equation, and
> specific accounts within each element.
164
What reports report on information for a period of time and what reports report on information in a point of time?
> The income statement, statement of owner’s equity, and cash flow statement all report information for a period of time.
> The balance sheet reports information at a point in time.
165
It is important to note that, because of the interrelationships of the financial statements, they are always prepared in the following order:
1) income statement,
2) statement of owner’s equity,
3) balance sheet, and
4) cash flow statement.
166
The income statement is prepared from the data appearing in what columns?
> The income statement is prepared from the data appearing in the revenue and expense columns of the tabular summary
167
The statement of owner’s equity is prepared from the data in what columns?
> The statement of owner’s equity is prepared from the data in the owner’s equity columns
168
The balance sheet is prepared from the two columns known as:
> The balance sheet is prepared from the assets and liabilities columns of the tabular summary and the month-end data
169
Along with a balance sheet, income statement, statement of owner’s equity, and statement of cash flows, every set of financial statements will include :
> will include explanatory notes and supporting schedules that are an essential part of the statements.
170
The annual report is a document that :
> The annual report is a document that includes useful non-financial information about the company, as well as financial information.
171
Non-financial information may include:
> management’s discussion of the company’s mission, goals, and objectives;
> the company’s market position; and
> the people involved in the company.
172
