Chapter 1 Flashcards
An organization that stands apart as a separate economic unit follows the
economic entity assumption.
An Economic Entity can be a:
Sole Proprietorship
Partnership
Corporation
Limited-Liability Company (L L C)
oversees creation and governance of accounting standards.
Financial Accounting Standards Board (F A S B)
oversees the U.S. financial markets.
Securities and Exchange Commission (S E C)
Accounting guidelines are called
Generally Accepted Accounting Principles (G A A P).
____ states that acquired assets and services should be recorded at their actual cost.
cost principle
assumes that the entity will remain in operation for the foreseeable future.
going concern assumption
requires that the items on the financial statements be measured in terms of a monetary unit.
monetary unit assumption
a set of global accounting guidelines.
Used or required by more than 166 nations/jurisdictions
Published by the International Accounting Standards Board (I A S B)
International Financial Reporting Standards (I F R S)
monitors the work of independent accountants who audit public companies.
The Public Company Accounting Oversight Board (P C A O B)
the basic tool of accounting, measuring the resources of the business and the claims to those resources.
accounting equation
What is the accounting equation?
assets = liabilities + equity
an economic resource that is expected to benefit the business in the future.
asset
Examples:
Cash
Merchandise Inventory
Furniture
Land
debts that are owed to creditors.
Liabilities
Many liabilities have the word payable in their titles.
Examples:
Accounts Payable
Notes Payable
Salaries Payable
to whom the business owes money
Creditors
The owners’ claims to the assets of the business are called
equity (also called stockholders’ equity)
the amount invested in the corporation by its owners, the stockholders
Contributed capital:
Also called paid-in capital
two components of equity
contributed capital and retained earnings
represents the basic ownership of every corporation.
Common stock
Equity earned from profitable operations that is not distributed to shareholders
Retained earnings
amounts earned from delivering goods or services o customers
Revenues
Increases in equity result from:
Contributed capital (owner contributions)
Revenues, which are amounts earned from delivering goods or services o customers
distributions of earnings to stockholders
Dividends
Decreases in equity result from:
dividends
expenses
Revenues > Expenses
Net income
Revenues < Expenses
Net loss
any event that affects the financial position of the business and can be measured with faithful representation.
transaction
buying a computer for the office for 2,000 cash
NOT hiring a new employee
Provides information about profitability
for a particular period for the company
Income statement
how is income statement prepared?
revenues - expenses = net income or net loss
Informs users about how much of the
earnings were kept and reinvested in the
company
Statement of
retained earnings
Provides valuable information to financial
statement users about economic
resources the company has (assets) as
well as debts the company owes
(liabilities) and allows decision makers to
determine their opinion about the
financial position of the company
Balance sheet
Assets = Liabilities + Stockholders’
Equity
Reports on a business’s cash receipts
and cash payments for a period of time
Statement of cash
flows
measures how profitably a company uses it assets.
Return on assets (R O A)
R O A is calculated by dividing net income by average total assets.
return on assets
net income / average total assets
