Topic 1 Flashcards
(24 cards)
What is the core purpose of accounting?
To record and summarize financial activity into reports that support decision-making about a business’s financial health.
What distinguishes financial accounting from managerial accounting?
Financial accounting serves external users with general-purpose information; managerial accounting serves internal users with custom reports.
What are the two core functions of an accounting system?
(1) Bookkeeping and (2) Structuring data for evaluation of business performance.
How does accounting help evaluate performance?
By organizing data into summary reports (financial statements) that show a company’s financial status.
What are the three primary financial statements?
Balance Sheet, Income Statement, Statement of Cash Flows
What does the balance sheet show?
A company’s assets, liabilities, and owners’ equity at a specific point in time.
What does the income statement show?
Revenues – Expenses = Net Income over a period of time.
What does the statement of cash flows show?
Cash inflows and outflows from Operating, Investing, and Financing activities.
Who uses financial accounting information?
Lenders, investors, management, employees, suppliers, customers, competitors, government, politicians, press.
What are the key accounting standard-setting organizations?
FASB, SEC, PCAOB, AICPA, IRS, IASB
What are the two items revealed on the balance sheet?
Debt (Liabilities) and Ownership (Equity)
How do you calculate total assets if liabilities = $300M and equity = $100M?
Assets = $400M
Under accrual accounting, when is revenue recognized?
When it is earned, even if cash has not yet been received
Where are cash payments to creditors and shareholders reported?
Cash Flows from Financing Activities
Why is GAAP important?
It ensures consistency and comparability in financial reporting across companies.
What is the trade-off between relevance and reliability in accounting?
Relevant info impacts decisions; reliable info is verifiable. Judgment is needed to balance them.
What is ‘materiality’ in accounting?
Information significant enough to affect user decisions.
What is ‘conservatism’ in accounting?
A principle to recognize losses quickly but delay recognizing gains.
What does an external audit report assure?
That the company’s financial statements fairly reflect its financial position (but not that the company is profitable or fraud-free)
Where are a company’s accounting assumptions and methods disclosed?
In the notes to financial statements
Match: Reliable
Information that can be verified
Match: Relevant
Information having to do with the matter at hand
Match: Material
Information that is important enough to make a difference
Match: Conservatism
Recognizing losses as they occur; don’t recognize gains until assured
