1. Introduction Flashcards
what is accounting (there are 4 key roles)
- accounting is the process of identifying, measuring, recording and communicating an organizations economic activities to users
what is the difference between internal and external users of accounting information
- internal users work for the organization and are responsible for operations
- external users dont work for the organization, like investors, creditors and customers
what is financial accounting
- the area of accounting that presents financial information of interest to external users
what is an organization
- a group of individuals who come together to pursue a common set of goals and objectives
what are the two types of orgs and what do they do
- business orgs: they sell products or services for profit
- non-business orgs: they exist to meet social needs and dont have profit as a goal, eg charities
what are the three most common forms of business orgs
- proprietorship
- partnership
- corporation
what is a proprietorship
- a business owned by one person
- it is not a separate legal entity, meaning the business and owner are considered the same
what is a partnership
- a business owned by two or more people
- it is not a separate legal entity
what is a corporation
- a business owned by one or more owners
- the owners are known as shareholders
what are shareholders and shares
- shareholders are entities who own shares of a corporation
- shares are units of ownership in a corporation
what is the difference between a publicly accountable enterprise and a private enterprise
- a publicly accountable enterprise is a corp whose shares can be publicly bought or sold on a stock exchange by any number of people
- a private enterprise is a crop whose shares are held privately by one or a few shareholders
what is the relationship between shareholders, the board of directors and the president of a corp
- shareholders elect the board of directors, usually annually
- the board of directors then appoint the president and other high ranking officials
what are the 6 qualities that financial information should posses, according to generally accepted accounting principles (GAAP)
- relevance
- faithful representation
- comparability
- verifiability
- timeliness
- understandability
what are the 4 types of financial statements
- income statement
- statement of changes in equity
- balance sheet
- statement of cash flows
what is the purpose of an income statement
- to communicate information about a business’s financial performance
- by summarizing revenues minus expenses over a period of time
what is the difference between revenue and assets
- revenue is created when a business provides products or services to a customer in exchange for assets
- assets are economic resources that provide future benefits to the business
what are expenses
- assets that have been used up
- or the obligations incurred in the course of earning revenues
what is net income and what information does it convey
- net income = revenue - expenses
- it communicates whether the activities of an entity are being conducted profitably
- so its one measure of the success of an entity
what is the purpose of a statement of changes in equity
- to provide information about how the balances in share capital and retained earnings changed during the period
what is share capital
- how much money shareholders have invested
what is the formula for retained earnings
- retained earnings = net income - dividends
in a statement of changes in equity report, what is the formula for total equity
- total equity = share capital + retained earnings
what is the purpose of a balance sheet
- to communicate what a business owns (assets)
- what the business owes (liatbilities)
- and the difference between assets and liabities at a point in time (shareholer equity)
what is the formula for total assets on a balance sheet
- total assets = total liabilities + shareholders equity
what is a liability
- an obligation to pay an asset in the future
- this is also called debt
what is the difference between accounts receivable and accounts payable
- accounts receivable represent amounts to be collected in cash in the future for goods sold or services provided (asset)
- accounts payable are obligations to pay a creditor for goods bought or services rendered (liability)
what is shareholders equity
- the net assets owned by the shareholders
- net assets are assets - liabilities
what is the purpose of the statement of cash flows
- to explain the inflows and outflows of cash over a period of time
what is the accounting equation
- assets = liabilities + shareholders equity
- aka: economic resources owned by an entity = creditors claims on assets + owners claims on assets
what are 4 common examples of assets
- cash
- accounts receivable
- prepaid insurance
- equipment
what are 3 common examples of liabilities
- bank loans
- accounts payable
- unearned revenue
what are 2 common examples of shareholder equity
- share capital
- retained earnings
why are financial statements prepared at regular intervals
- to keep a number of interested groups informed about the financial performance of an entity
- the timing is determined by the needs of management in running the entity
- or by outside parties like bankers to aid in granting loans to the entity
- or by shareholders interested in evaluating progress
