Exam 1 - Chapters 1-3 Flashcards
(79 cards)
1
Q
Financial Accounting
A
- Information describing the financial resources, obligations, and activities of an economic entity
- Assists external users
- “General-purpose” accounting information
2
Q
Management Accounting
A
- The development and interpretation of accounting information intended specifically to assist management in operating a business
- Only to internal users
3
Q
Accounting System
A
- Consists of the personnel, procedures, technology, and records used by an organization
- Develop accounting information
- Communicating information to decision makers
4
Q
Basic Functions of an Accounting System
A
- Interpret and record the effects of business transactions
- Classify the effects of similar transactions in a manner that permits determination of the various totals and subtotals useful to management and used in accounting reports
- Summarize and communicate the information contained in the system to decision makers
5
Q
Control Environment
A
- The foundation for all the other elements of internal control, setting the overall tone for the organization
- Commitment to ethical values
- Responsibility
- Accountability
6
Q
Risk Assessment
A
- Identifying, analyzing, and managing those risks that pose a threat to the achievement of the organization’s objectives
7
Q
Control Activities
A
- The policies and procedures that management puts in place to address the risks identified during the risk assessment process
8
Q
Information and Communication
A
- Developing information systems to capture and communicate operational, financial, and compliance-related information necessary to run the business
9
Q
Monitoring Activities
A
- Enable the company to evaluate the effectiveness of its system of internal control over time
10
Q
External Users
A
- Individuals and other enterprises that have a current or potential financial interest in the reporting enterprise, but that are not involved in the day-to-day operations of that enterprise
- Owners, creditors, investors, labor unions, government, suppliers, customers
11
Q
Cash Flow Prospects
A
- Composed of return of investment and return on investment
12
Q
Return of Investment
A
- The return to you at some future date of the amount you had invested or loaned
13
Q
Return on Investment
A
- The company paying you something for the use of your funds, wither as an owner or a creditor
14
Q
Financial Statement
A
- A monetary declaration of what is believed to be true about an enterprise
15
Q
Types of Financial Statements
A
- Balance sheet
- Income statement
- Statement of cash flows
16
Q
Balance Sheet
A
- A position statement that shows where the company stands in financial terms at a specific date
17
Q
Income Statement
A
- An activity statement that shows details and results of the company’s profit-related activities for a period of time
- A summary of the company’s revenue and expense transactions for a period of time
18
Q
Statement of Cash Flows
A
- An activity statement that shows the details of the company’s activities involving cash during a period of time
19
Q
Statement of Financial Position
A
- Balance sheet
20
Q
General Purpose Information
A
- “One-size fits all”
21
Q
Accounting
A
- Provides information that is useful in making good decisions, and as a a result of good decisions societal prosperity and welfare is maximied
22
Q
Accounting
A
- The “language of business”
23
Q
Tax Accounting
A
- Information must conform with income tax reporting requirements
24
Q
The Accounting Process
A
- The Accounting Process ->
- Accounting Information ->
- Decision Makers ->
- Economic Activities ->
25
Components of Internal Control
- Control environment
- Risk assessment
- Control activities
- Information and communication
- Monitoring
26
GAAP
- Generally Accepted Accounting Principles
- Provides a general framework for determining what information is included in the financial statements and how that information is prepared and presented
27
SEC
- Securities and Exchange Commission
- Governmental agency with legal power to establish accounting principles and financial reporting requirements for publicly owned corporations
- Delegates standard setting responsibility to the FASB
- Reviews financial statements
28
FASB
- Financial Accounting Standards Board
- Independent rule-making body
- Recognized as the most authoritative source of GAAP
- Maintains the ASC which includes all standards and represents an official expression of GAAP
29
IASB
- International Accounting Standards Board
- London-based panel of elite professionals with expert knowledge of accounting methods used in the most vibrant capital markets
- Issues IFRS
- More that 100 countries require these standards
- SEC accepts their financial statements
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Audits
- Financial Statement Audits
- An examination of a company's financial statements, designed to determine the fairness of the statements
- Judged based on the standards of GAAP
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Legialation
- Board of directors and audit committees are tasked with additional oversight responsibilities
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Professional Organizations
- Improve the quality of accounting information that is used by investors, creditors, management, and others
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AICPA
- American Institute of CPAs
- Provide members with the most relevant knowledge
- Works closely with FASB to help GAAP
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IMA
- Institute of Management Accountants
- Provides a forum for many functions and the advocacy of highest ethical and best business practices in management accounting and finance
- Influences concepts and ethical practices for management accounting and financial accounting
35
IIA
- Institute of Internal Auditors
- Primary institutional professional association dedicated to the promotion and development of the practice of internal auditing
- Provides audit specialty services
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AAA
- American Accounting Association
| - Further discipline the profession of accounting
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CPA
- Certified Public Accountant
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CMA
- Certified Management Accountant
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CIA
- Certified Internal Auditor
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Bookkeeping
- The recording of routine transactions and day-to-day record keeping
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Accounting Cycle
- The sequence of accounting procedures used to record, classify, and summarize accounting information in financial reports at regular intervals
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The First Three Steps of the Accounting Cycle
- Journalize transactions
- Post each journal entry to ledger accounts
- Prepare a trial balance
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Accounting Records
- Establish accountability
- Keep track of activities
- Obtain information on a transaction
- Track the efficiency of a department
- Documentary evidence of business activities
44
Account
- The record used to keep track of the increases and decreases in financial statement items
- Ledger account
- Three elements: title, debit side, and credit side
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Ledger
- The accounting record which includes the entire group of individual accounts
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Assets
- Increase debit
- Decrease credit
- Economic resources
- Owned by the business
- Expected to benefit future operations
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Liabilities
- Decrease debit
- Increase credit
- Financial obligations or debts
- Negative future cash flows
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Owner's Equity
- Decrease debit
- Increase credit
- Represents the owners' claims on the assets of the business
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Double-entry Accounting
- Every transaction is recorded by equal dollar amounts of debits and credits
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The Journal
- The information about each business transaction is initially recorded here
- Day-by-day
- Later transferred to the general ledger
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Posting
- Updating the ledger accounts for the effects of the transactions recorded in the journal
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Net Income
- An increase in owner's equity from profits of the business
- As income is earned, either an asset in increased or a liability is decreased
- Net income always results in the increase of owner's equity
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Retained Earnings
- Represents the total net income of the corporation over the entire life time of the business
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Accounting Period
- The period of time covered by an income statement
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Time Period Principle
- Net income is measured for relatively short accounting periods of equal length to facilitate the interpretation of financial events and the preparation of financial statements
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Fiscal Year
- The 12-month accounting period used by an entity
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Revenue
- The price of goods sold and services rendered during an accounting period
- Owner's equity increases
- Increase cash or accounts receivable
- Gross increase in equity
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Realization Principle
- Indicates that revenue should be recognized at the time goods are sold or services are rendered
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Expenses
- The costs of the goods and services used up in the process of earning revenue
- Decrease owner's equity
- Decrease in assets or increase in liabilities
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The Matching Principle
- Refers to the concept of offsetting expenses against revenue on a basis of cause and effect
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Accrual Basis of Acounting
- Revenue is recognized the period it is earned
| - Expenses are recognized in the period they are incurred
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Cash Basis of Accounting
- Revenue is recognized when cash is collected
| - Expenses are recognized when payments are made
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Dividends
- A distribution of assets y a corporation to its stockholders
- Reduces assets and owner's equity
- Not an expense
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Features of the Balance Sheet
- Heading: names of the business, name of the financial statement, and date
- Assets: start with cash
- Liabilities: before equity
- Equity: divided into capital stock and retained earnings
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Business Entity
- An economic unit that engages in identifiable business activities
- Business activities are separate from personal activities
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The Cost Principle
- Historical cost refers to the original amount the entity paid to acquire the asset
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The Going-Concern Assumption
- Indicates that we assume that a business will be a continuing enterprise which will operate for an indefinite period
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The Objectivity Principle
- Describes information that is factual, definite, and verifiable
- Lacks subjectivity
- A primary reason for reporting long-term assets at historical cost as that value is verifiable
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The Stable-Dollar Assumption
- A limitation of measuring assets at historical cost is that the value of the monetary until or dollar is not always stable
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Inflation
- A term used to describe the situation where the value of the monetary unit decreases, meaning that it will purchase less than it did previously
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Deflation
- The value of the monetary unit increases, meaning that it will purchase more than it did previously
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Increases in Owners' Equity
- Investments of cash or other assets by owners
| - Earnings from profitable operation of the business
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Decreases in Owners' Equity
- Payments of cash or transfers of other assets to owners
| - Losses from unprofitable operation of the business
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Sole Proprietorship
- An unincorporated business owned by one person
- Often the owner also acts as the manager
- Small retail stores, farms, law practices, medicine, etc.
- Most common form of business organization
75
Partnership
- Owned by two or more people
- Small businesses and large professionals
- Owners are responsible for debts
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Corporations
- Entity separate from owners
- Owners are not responsible for debts
- Owners can lose no more than what they have invested (limited liability)
- Dominant form of business
- Stockholders
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Liquidity
- The ability of the business to pay its debts as they come due
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Profitibility
- The company's ability to generate net income from the business
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Adequate Disclosure
- Users of financial statements are informed of all information necessary for the proper interpretation of the statements
