1. Financial Accounting Flashcards
accounting
The process of:
- identifying
- measuring
- communicating
economic information to allow for informed judgements and decisions.
What are the four basic assumptions accountants make?
1) economic entity
2) accounting period
3) monetary unit
4) going concern
economic entity assumption
The assumption that the financial activities of a business can be separated from the financial activities of the business’ owner(s).
accounting period assumption
The assumption that economic information can be meaningfully collected and communicated over short periods of time.
monetary unit assumption
An assumption that the dollar is the most effective means to communicate economic activity.
going concern assumption
The assumption that a company will continue to operate into the foreseeable future.
income statement
(also known as…)
profit and loss statement
Reports a company’s revenues and expenses over a specific period of time and the resulting profit or loss.
revenue
An increase in resources resulting from the sale of goods or the provision of services.
revenue recognition principle
The principle that revenue should be recorded when a resource has been earned and not just when the cash is received.
expense
A decrease in resources resulting from the operation of a business.
matching principle
The principle that expenses should be recorded in the period resources are used to generate revenues.
Key Formula
income statement
Revenues – Expenses = Net Profit or Net Loss
(or Income, more formally, Total Comprehensive Income)
asset
An economic resource that is objectively measurable, results from a prior transaction and will provide future economic benefit.
cost principle
(also known as…)
historical cost principle
The principle that assets should be recorded and reported at the cost paid to acquire them.
liability
An obligation of a business that results from a past transaction and will require the sacrifice of economic resources at a future date.
equity
The difference between a business’ assets and liabilities, representing the share of assets that is claimed by the business’ owner(s).
contributed capital
The resources that investors contribute to a business in exchange for ownership interest.
dividends
Profits that are distributed to owners.
(usually called drawings if the business is not a company)
retained earnings
Profits that are kept in the business.
What does a balance sheet show?
(also known as…)
statement of financial position
The financial statement that shows a business’ assets, liabilities and equity at a specific point in time.
Key Formula
accounting equation
(also known as…)
balance sheet equation
Assets = Liabilities + Equity
statement of changes in equity
A financial statement that reports the change in a business’ equity over a specific period of time.
(contributed equity, reserves and retained earnings)
Key Formula
statement of changes in equity
(the retained earnings part)
Retained Earnings, Beginning Balance
+/– Net Profit / Loss
– Dividends
= Retained Earnings, Ending Balance
What are the three steps involved in preparing a financial statement for any business?
The income statement must be prepared first, followed by the statement of changes in equity and then the balance sheet.
cash flow statement
A financial statement that reports a business’ sources and uses of cash over a specific period of time.
Give examples of financing, investing and operating activities.
financing activities
generating and repaying cash from creditors and investors
investing activities
the buying and selling of revenue-generating assets
operating activities
the purchase of supplies, the payment of employees and the sale of products
Key Formula
cash flow statement
Cash Flows Provided (Used) by Operating Activities
+/– Cash Flows Provided (Used) by Investing Activities
+/– Cash Flows Provided (Used) by Financing Activities
= Net Increase (Decrease) in Cash
+ Cash at the beginning
= Cash at the end
relevance
The capacity of accounting information to affect decisions.
materiality
The threshold at which a financial item begins to affect decision-making.
faithful representation
Financial information that is presented in a way that is:
- complete
- neutral
- free from error.
comparability
The ability to use accounting information to be:
weighed against or contrasted to the financial activities of different businesses.
verifiability
When information allows different independent observers to arrive at:
the same or similar outcomes.
timeliness
When information is provided quickly enough that the user can take action.
understandability
The ability of accounting information to be
comprehensible to those who have a:
‘reasonable understanding of business and economic activities and accounting and a willingness to study the information with reasonable diligence’.
Conceptual Framework for Financial Reporting
The
- characteristics
- objectives
- concepts
that guide the way in which accounting is carried out.
