Chapter 1 Flashcards
Accounting
a system that identifies, records, and communicates info that is relevant, reliable, and comparable about an organization’s business activities
recordkeeping
the recording of transactions and events
external users (examples)
customers, shareholders, govt, nonmanagerial/nonexecutive employees, labor unions
internal users (examples)
mgrs, officers, sales staff, controllers
financial accounting
provides external users with financial statements
used to decide how to interact with the company
managerial accounting
provides internal users with info to make decisions
used to decide how to manage the company
four areas of opportunity in accounting
- financial (prep)
- managerial (internal auditing)
- taxation (regulatory)
- accounting-related (consultants)
private accounting
employee working for a business
public accounting
auditing/taxation/advisory services; not necessarily public-sector
steps to make ethical decisions
- identify ethical concern
- analyze options
- make ethical decision
fraud triangle
three factors that push a person to commit fraud
- opportunity
- incentive
- rationalization
internal controls
procedures set to:
- protect assets
- ensure reliable accting
- promote efficiency
- uphold company policies
GAAP definition
concepts and rules that govern financial accting practice
GAAP components
- relevant info (affects decision of its users)
- reliable info (trusted by users)
- comparable info (used in comparisons across years/companies)
securities and exchange commission (SEC)
USA govt agency that has legal authority to establish reporting requirements and GAAP for companies that issue stock to the public
financial accounting standards board (FASB)
private group that sets both broad and specific principles; given task to set GAAP from the SEC
international accounting standards board (IASB)
issues international standards that identify preferred accting practices in other countries (100+)
international financial reporting standards (IFRS)
similar to, but sometimes different from USA GAAP
general principles
assumptions, concepts, and guidelines for prepping financial statements
specific principles
detailed rules used in reporting business transactions and events
measurement/cost principle
accting info is based on atual cost
revenue recognition principle
provides guidance on when a company must recognize revenue
- when goods/services are provided to customers
- at the amt expected to be received from selling products/services
matching principle/expense recognition
company must record its expenses incurred to generate the revenue
full disclosure principle
a company must report details behind financial statements that would impact users’ decisions
going-concern assumption
accting info reflects a presumption the business will continue operating
monetary unit assumption
transactions can be expressed in money
time period assumption
life of a company can be divided into time periods
business entity assumption
business is accounted for separately from its owner/other business entities
business entity forms
- sole proprietorship (1)
- partnership (2+)
- corporation (1+ shareholders)
- limited liability company - LLC (1+)
cost-benefit constraint
info disclosed by an entity must have benefits to the user that are greater than the costs of providing it
sarbanes-oxley act (SOX)
what: requires public companies to apply both accounting oversight and stringent internal controls
why: in response to publicized accounting scandals (enron, tyco)
desired result: more transparency, accountability, and truthfulness in reporting transactions
accounting equation
assets = liabilities + equity
expanded acct equation
assets = liabilities + cont. capital - dividends + revenues - expenses
transaction analysis
process used to analyze transactions and events
external transaction
exchange of value between two entities
ex: sale of applecare by apple
internal transaction
exchanges within any entity
ex: target’s use of its supplies - reported as expenses when used
events
happenings that affect an entity’s acct equation and can be reliable measured
ex: natural event (like a fire) that destroys assets
income statement
describes a company’s revenue and expenses along with resulting net income/loss over a period of time
revenues - expenses = net income
statement of retained earnings
explains changes in retained earnings from net income/loss and any dividends over a period of time
beg. retained earnings + net income - dividends = end retained earnings
balance sheet
describes a company’s financial position at a point in time
assets = liabilities + equity
statement of cash flows
+/- operating cash flow +/- investing cash flow +/- financing cash flow = change in cash
return on assets (ROA)
(net income) / (avg total assets)
