Chapter 1 Flashcards
The process of identifying, measuring, recording, and communicating an organization’s economic activities to users.
ACCOUNTING
Users who work for the organization and are responsible for planning, organizing, and operating the entity.
INTERNAL USERS
Users who do not work for the organization and include investors, creditors, labour unions, and customers.
EXTERNAL USERS
The area of accounting that serves the decision-making needs of internal users.
MANAGERIAL ACCOUNTING
The area of accounting that focuses on external reporting and meeting the needs of external users.
FINANCIAL ACCOUNTING
A group of individuals who come together to pursue a common set of goals and objectives (e.g., business & non-business)
ORGANIZATION
A type of organization that sells products and/or services for profit.
BUSINESS ORGANIZATION
A type of organization that exists to meet various societal needs and does not have profit as a goal (e.g., charity or hospital)
NON-BUSINESS ORGANIZATION
A business owned by one person and is not a separate legal entity from the owner.
PROPRIETORSHIP
Two characteristics of a proprietorship
UNLIMITED LIABILITY & SAME LEGAL ENTITY
One characteristic of a sole proprietorship that means if the business could not pay its debts, the owner would be responsible even if the business’s debts were greater than the owner’s personal resources.
UNLIMITED LIABILITY
A business owned by two or more individuals, is not a separate legal entity, and its owners are typically subject to unlimited liability.
PARTNERSHIP
A business owned by one or more owners, AKA shareholders.
CORPORATION
Units of ownership in a corporation
SHARES OR STOCKS
A corporation that holds its shares privately and does not sell them publicly.
PRIVATE ENTERPRISE (PE)
A corporation that sells its shares publicly, typically on a stock exchange.
PUBLICALLY ACCOUNTABLE ENTERPRISE (PAE)
The owners or shareholders of a corporation are not responsible for the corporation’s debts, meaning that the most they can lose is what they invested in the corporation.
LIMITED LIABILITY
A set of principles and assumptions that guide the preparation of financial statements, and that have gained wide-spread acceptance among users and practitioners.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
SIX QUALITATIVE CHARACTERISTICS OF GAAP
Relevance, faithful representation, comparability, verifiability, timeliness, and understandability
Accounting principle that requires that each economic entity maintain separate records.
BUSINESS ENTITY
Accounting principle that requires a business to use the same accounting policies and procedures from period to period.
CONSISTENCY
Accounting principle that requires each economic transaction be based on the actual original cost (also known as historical cost principle).
COST
Accounting principle that requires accounting information communicate sufficient information to allow users to make knowledgeable decisions. Example: A business is applying to the bank for a $1,000,000 loan. The business is being sued for $20,000,000 and it is certain that it will lose. The business must tell the bank about the lawsuit even though the lawsuit has not yet been finalized.
FULL DISCLOSURE
Accounting principle that assumes a business will continue for the foreseeable future.
GOING CONCERN
Accounting principle that requires financial transactions be reported in the period in which they occurred/were realized. Example: Supplies were purchased March 15 for $700. They will be recorded as an asset on March 15 and then expensed as they are used
MATCHING
Accounting principle that requires a business to apply proper accounting only for items that would affect decisions made by users (e.g., Example: The business purchases a stapler for $5 today. Technically, the stapler will last several years so should be recorded as an asset. However, the business will record the $5 as an expense instead because depreciating a $5 item will not impact the decisions of financial information)
MATERIALITY
Accounting principle that requires financial information be communicated in stable units of money (e.g., Land was purchased in 1940 for $5,000 Canadian. It is maintained in the accounting records at $5,000 Canadian and is not adjusted.)
MONETARY UNIT
Accounting principle that requires revenues be recorded when earned and expenses be recorded when incurred, which is not necessarily when cash is received (in the case of revenues) or paid (in the case of expenses) (e.g., A sale occurred on March 5. The customer received the product on March 5 but will pay for it on April 5. The business records the sale on March 5 when the sale occurred even though the cash is not received until April 5.)
RECOGNITION
What evaluates the performance of an entity, measures its progress, and communicates info to external users?
FINANCIAL STATEMENTS
Financial statement that communicates information about a business’s financial performance by summarizingrevenueslessexpensesover a period of time.
INCOME STATEMENT
Created when a business provides products or services to a customer in exchange for assets
REVENUES
The assets that have been used up or the obligations incurred in the course of earning revenues.
EXPENSES
Financial statement that provides information about how the balances in Share capital and Retained earnings changed during the period.
STATEMENT OF CHANGES IN EQUITY
Represents how much shareholders have invested
SHARE CAPITAL
When a corporation sells its shares to shareholders.
ISSUING SHARES
The sum of all net incomes earned by a corporation over its life, less any distributions of these net incomes to shareholders
RETAINED EARNINGS
Distributions of net income to shareholders.
DIVIDENDS
Financial statement that shows a business’s assets, liabilities, and equity at a point in time (aka statement of financial position)
BALANCE SHEET
Economic resources that provide future benefits to the business. Examples include cash, accounts receivable, prepaid expenses, equipment, and trucks
ASSETS
Coins and currency, usually held in a bank account, and is a financial resource with future benefit because of its purchasing power.
CASH
Represents amounts to be collected in cash in the future for goods sold or services provided to customers on credit.
ACCOUNTS RECEIVABLE
Assets that are paid in cash in advance and have benefits that apply over future periods.
PREPAID EXPENSES
An obligation to pay an asset in the future.
LIABILITY
Obligations to pay a creditor for goods purchased or services rendered.
ACCOUNTS PAYABLE
Represents an advance payment of cash from a customer for services or products to be provided in the future.
UNEARNED REVENUE
Represents the net assets owned by the owners (shareholders) and consists of share capital and retained earnings
EQUITY
Explains how the balance in cash changed over a period of time by detailing the sources (inflows) and uses (outflows) of cash by type of activity: operating, investing, and financing, as these are the three types of activities a business engages in.
STATEMENT OF CASH FLOW (SCF)
A set of less onerous GAAP-based standards developed by the Canadian Accounting Standards Board (AcSB).
Accounting Standards for Private Enterprises (ASPE)
The body that governs accounting standards in Canada.
Canadian Accounting Standards Board (AcSB).
Information that possesses the quality of ______ has the ability to make a difference in the decision-making process.
RELEVANCE
Information that possesses the quality of ________ is complete, neutral, and free from error.
FAITHFUL REPRESENTATION
Information that possesses the quality of __________ tells users that businesses utilize similar accounting practices.
COMPARABILITY
Information that possesses the quality of _______ means that others are able to confirm that the information faithfully represents the economic activities of the business.
VERIFIABILITY
Information that possesses the quality of __________ is available to decision makers in time to be useful.
TIMELINESS
Information that possesses the quality of ____________ is clear and concise
UNDERSTANDABILITY
The organization that issues the IFRS.
International Accounting Standards Board (IASB)
When revenues are greater than expenses
NET INCOME
When expenses are greater than revenue
NET LOSS
Someone who owns the right to receive payment from an individual or business.
CREDITOR
Assets minus liabilities
NET ASSETS
When assets are financed through liabilities
DEBT
The day-to-day processes involved in selling products and/or services to generate net income.
OPERATING ACTIVITIES
The buying of assets needed to generate revenues.
INVESTING ACTIVITIIES
The raising of money needed to invest in assets.
FINANCING ACTIVITIES
Shows that the total assets of a business must always equal the total claims against those assets by creditors and owners.
ACCOUNTING EQUATION (ASSETS = LIABILITIES + EQUITY)
Economic exchange
FINANCIAL TRANSACTION
The 12-month period that financial statements are prepared at the end of.
FISCAL YEAR
Time period when accounting reports are prepared at the end of each 12-month period
YEAR END
When financial statements are prepared around every three months
INTERIM FINANCIAL STATEMENTS
