Chapter 1 Flashcards
What is accounting?
The information system that identifies, records, and communicates the economic events of an organization to a wide variety of interested users. (such as shareholders, decision makers and people looking to invest their money.)
How do companies decide which products to sell and in which market? (Give example)
They look at the data that they create through surveys of a specific demographic.
For example, When RBI (restaurant brands international) created a campaign with Justin beiber and new drink options they made that decision based on data from a survey and it led them to an increase in profits.
What are the two types of accounting?
Financial accounting and Management accounting.
What is Financial accounting?
Financial accounting provides information to people outside the company.
What is Management accounting?
Management accounting is for people within a company, it helps them make decisions about the company.
What is GAAP
GAAP stands for generally accepted accounting principles.
When following GAAP, what standards do you have to adhere to?
International Financial Reporting Standards (IFRS) and Accounting Standards for Private Enterprises (aspe)
Why do you have to adhere to the GAAP rules?
You must adhere to generally accepted accounting principles if you are on the stock exchange (public company) so that it’s consistent across the globe. This way everyone can compare “apples to apples.” And everyone can make an equal decision.
What is economic entity concept?
Economic entity concept means that the activities of an organisation in society (like a business) are kept separate and distinct from other entities and the owner. This means that you can’t write off personal expenses against your business.
What is going concern assumption?
A going concern assumption, is the assumption that an entity (like a business) will continue to “live” in the foreseeable future.
What is a monetary unit?
A monetary unit is a currency.
What is a historical cost principle? (Give example)
Historical cost principle is how much something costs, wether or not you get a loan. For example, If I buy a pet cow for 200 dollars, but I borrow 150 from the bank, the historical cost of the cow is still 200 dollars.
What is an asset?
Assets have future economic benefit to the company or person. Basically assets are things that hold economic value. Assets can prove to banks, if you don’t pay back your loan you will have the money to give the bank what you owe them. This makes you a low risk customer and they are more likely to want to give the loan to you.
What is a liability?
A liability is something you owe. This can be goods or services. It can also be money.
What is owner’s equity?
Net residual value :Owner’s equity is the amount of assets you have after you have paid off all of your debts. It can also be thought of as how much you own of an asset.
What is the accounting equation? Give me a acronym for it.
Assets = liabilities + owner’s equity (ALOE)
What is revenue?
Revenue is money generated through goods or services.
What is an expense?
An expense is something you pay for in order to make more money.
What is a balance sheet?
A financial statement that reports the assets, liabilities, and owner’s equity at a specific date.
What are important aspects of an ethical balance sheet?
Balance sheets have to be easily comparable and reliable.
What does a statement of owner’s equity show?
A statement of owner’s equity shows the changes that occurred to the equity over a period of time.
What are the three types of business?
Sole proprietorship
Partnerships
Corporations
What are the advantages and disadvantages of a sole proprietorship?
Advantages:
Sole proprietorships have one single owner
The business is separate and distinct from personal taxes.
Their are tax advantages if the business has a loss (Under zero)
Disadvantages of a sole proprietorship
Limited life span (When you go down, so does your business as it’s not a separate entity from yourself.)
You have unlimited liability - meaning, if you are sued, you go down with your business because your business is not a separate entity.
In what order do you prepare financial statements?
1) The income statement
2) The statement of owner’s equity
3) The balance sheet
What increases owner’s equity?
owner’s investments in the business
Revenues
What decreases owner’s equity?
Withdrawals (From owner(s))
Expenses
Why if I purchase something “on account” why is it not an expense?
It’s not an expense because we have not used it yet. It’s only an expense once you’ve used it. Instead it’s supply (an asset)
What is “supply” Within a business?
Supplies is an asset, expenses are “used up”
When is revenue recorded? What’s irrelevant?
Revenue is recorded when it’s earned, cash or not is irrelevant
What are <>?
Negative numbers
What is capital drawings?
Capital drawings is money that the owner takes out of the company
What are double lines for?
The end of the statement (it’s complete)
What does Account mean?
A record of increases and decreases in a specific asset, liability, or owner’s equity item.
What are Accounting Standards for Private Enterprises (ASPE)
Accounting Standards for Private Enterprises (ASPE)
What is an Accounting transaction?
An economic event that is recorded in the accounting records because it changes the assets, liabilities, or owner’s equity items of the organization.
What does Accounts payable mean?
A liability created by buying services or products on credit. It is an obligation to pay cash to a supplier in the future.
What does Accounts receivable mean?
An asset created when selling services or products to customers who promise to pay cash in the future.
What is an Annual report?
Information that a company gives each year to its shareholders and other interested parties about its operations and financial position. It includes the financial statements and auditors’ report, in addition to information and reports by management.
What is a Cash flow statement?
A financial statement that provides information about the cash receipts and cash payments for a specific period of time.
What does Comparability mean in terms of accounting?
An enhancing qualitative characteristic that accounting information has if it can be compared with the accounting information of other companies because the companies all use the same accounting principles.
What is a Conceptual framework of accounting?
A coherent system that guides the development and application of accounting principles.
What does consistency mean in terms of accounting?
The use of the same accounting policies from year to year. Consistency is part of the comparability enhancing qualitative characteristic of accounting information.
What is a Corporation?
A business organized as a separate legal entity under corporation law, with ownership divided into transferable shares.
Who are Creditors?
All of the persons or entities that a company owes money to.
What are Drawings in terms of accounting?
Withdrawals of cash or other assets from an unincorporated business for the owner’s personal use. Drawings result in a decrease in an asset and a decrease in owner’s equity.
What are the Elements of the financial statements?
The components in the financial statements: assets, liabilities, owner’s equity, revenues, and expenses.
What does Fair value mean in terms of accounting?
Generally the amount the asset could be sold for in the market assuming the company is a going concern, not the amount that a company would receive in an involuntary liquidation or distress sale.
What is a ( single step) Income statement?
A financial statement that presents the revenues and expenses and resulting profit (or loss) for a specific period of time.
What is a Limited liability?
The legal principle that the owners’ liability for the debts of the business is limited to the amount they invested in the business.
What is Matching concept?
The accounting concept that prescribes when a cost incurred by a business should be recognized as an expense. The general concept states that, if a direct association exists between a cost incurred and a revenue recognized, the cost should be recognized as an expense in the same period as the revenue is recognized.
