Ch. 1: What Is Accounting? Flashcards
Accounting consists of 3 basic activities:
—————-
—————-
—————-
the economic (financial in nature) events of an organization to interested users.
- identifies
- records, and
- communicates
What is a transaction?
It is an exchange between 2 parties.
Sometimes the parties can be internal, such as within the company itself. Or external.
Explain how accounting is identified, recorded, communicated.
- identified: For example, Walmart sells a pair of shoes.
- Recorded:Keeping a chronological log of transactions, such as receipts.
- Communicated: Prepare, analyze, and interpret reports such as financial statements to help users make decisions.
Accounting is an information and measurement ———- that ———, —————, and ————— an organization’s business activities to users.
System
Identifies
Records
Communicates
Why is accounting called the [language of business]?
Because all organizations set up an accounting information system to communicate data to help people make better decisions.
Accounting is important because…
- As long as you properly prepare an income statement or a balance sheet, I can read what is going on in your company.
- So The only way people with money can fund ideas for people Who don’t have money is through properly preparing accounting reports.
Accounting serves many users who can be divided into two groups:
- external users (outside the company)
- internal users (inside the company)
Examples of external users are:
- **lenders
- **shareholders
- external auditors
- board of directors
- regulators, such as government agencies.
When we are preparing accounting information, we are targeting mainly lenders and shareholders. Why?
-because lenders lend you money.
-because shareholders invest money.
Both of these groups provide capital. Without capital providers, a business cannot survive. 
——- ———- ———- are prepared for external users.
Financial Accounting Reports.
The discipline of external users is called financial accounting.
Examples of internal users are:
- research and development managers
- purchasing managers
- Human Resource managers
- marketing managers
- production managers
The discipline is called /The reports you prepare for internal users is called:
Managerial Accounting/Managerial Accounting Reports
For example, R&D managers would like to know how much money they can get from the annual budget to develop a new product. What report will help them do that?
Managerial Accounting Reports. Internal users can use these reports to make better decisions.
Identify the following question as most likely to be asked by an internal (I) or external (E) user of accounting information: which inventory items are out of stock?
Internal
Identify the following question as most likely to be asked by an internal (I) or external (E) user of accounting information: Should we make a five year loan to the business?
Bankers and lenders lend money to businesses. External.
Identify the following question as most likely to be asked by an internal (I) or external (E) user of accounting information: what are the costs of our product’s ingredients?
The production manager or general manager for that division would be interested in this kind of information. Internal.
Identify the following question as most likely to be asked by an internal (I) or external (E) user of accounting information: should we buy, hold, or sell a company’s stock?
External. Shareholders.
Identify the following question as most likely to be asked by an internal (I) or external (E) user of accounting information: Should we spend additional money for redesign of a product?
Internal. Production manager or R&D manager would be interested in this information.
Identify the following question as most likely to be asked by an internal (I) or external (E) user of accounting information: which firm reports the highest sales and income? (Assume an investor is asking)
External if it’s an investor asking about different companies. If it’s a firm within the company then it’s internal.
In this case, external.
Identify the following question as most likely to be asked by an internal (I) or external (E) user of accounting information: What are the costs of our service to customers?
Internal because it involves making budgeting decisions.
Identify the following users as an internal (I) to external (E) user: research and development executive
Internal
Identify the following users as an internal (I) to external (E) user: Human Resources executive
Internal
Identify the following users as an internal (I) to external (E) user: politician
External. They are outside the company.
Identify the following users as an internal (I) to external (E) user: shareholder
External. People who give money to the company to help the company invest and grow. They also expect to get a profit from the company.
Identify the following users as an internal (I) to external (E) user: distribution manager
Internal. Managers are people who work for the company.
Identify the following users as an internal (I) to external (E) user: creditor
External. Creditors lend money to a company but they expect you to give that money back to them plus interest.
Identify the following users as an internal (I) to external (E) user: production supervisor
Internal.
Identify the following users as an internal (I) to external (E) user: purchasing manager
Internal. They are interested in how much we need to buy in order to produce or in order to sell what we need to sell.
