Chapter 1 Flashcards
What are the four financial statements?
- the income statement
- statement of changes in equity
- balance sheet
- statement of cash flow
what is share capital?
the money an entity raises by selling stocks.
what is a statement in changes of equity?
provides information about how the balances in share capital and retained earnings changed during the period
what are retained earnings?
the accumulated portion of a businesses profits that are not distributed as dividends to shareholders but instead reinvested back into the company.
what is a balance sheet?
also called statement of financial position, shows a businesses assets, liabilities and equity at a point in time
what are net assests?
assests minus liabilities
what equation represents a balance sheet?
assets = liabilites + equity
what is an income statement?
tracks a companies revenues, expenses, gains and losses during a set period.
what is a statement of cash flow?
tracks the inflow and outflow of cash providing insights into a companies financial health
what is the accounting equation?
assets = liabilities + equity
how do accountants view transactions?
as economic events that change components within the accounting equation
what are source documents?
sales invoices and bills for creditors
what is double entry accounting?
a system where every financial transaction is recorded at least twice.
what are the GAAP?
a set of accounting principles, concepts and guidlines that guide the rules, practices and standards
what are the nine GAAP?
- Business Entity Principle
- Consistency
- Cost
- Recognition principle
- Going concern principle
- Full disclosure
- Matching principal
- materiality
- monetary unit
what is the business entity principal?
requires that each economic entity maintains separate records.
what is the monetary unit principal?
a specific unit of currency must be used when the company records transactions. Such as euro, cad etc
what is the cost principal?
requires that each economic transaction be based on the actual original cost
what is the matching principal?
requires that financial transactions be reported in the period in which they occured/were realized)
what is the going concern principal?
when a company is considered to operate indefinitely into the future, which means that certain expenses can be deffered to a future date.
what is full disclosure principal?
companies must have full transparency with all financial details and have them available to the public. ensures companies do not indulge in unethical behavior.
what is the consistency principal?
requires that a business use the same accounting policies and procedures from period to period
what is the principal of materiality?
requires that a business to apply proper accounting only for items that will affect desicions by users.
what is the principal of recognition?
requires the revenues be recorded when earned and expenses be recorded when incurred.
how does the matching concept more accurately determine the net income of a business?
The matching concept states that revenue is recognized in the time period when goods and services are provided and that the assets of the entity that have been used up during the time period (expenses) must be matched with the asset inflows (revenues) during the same period.
when are revenues recognized?
revenue should be recognized in the period that it is earned, irrespective of wether a cash transaction has occured
what defines accounting?
identifying, measuring, recording and communicating an organizations economic activities
What are the qualities that accounting information is expected to have?
1.revelence
2. faithful representation
3. comparability
4. verfiability
5. timeliness
6. understandability
What are the limitation on the disclosure of useful accounting information?
Accounting information should only be disclosed if it is material - that is, of sufficient size or importance to influence the judgement of a reasonably knowledgeable user. Accounting information should also be disclosed in such a manner that the benefits of doing so outweigh the costs.
what are assets?
An asset is anything of value that is owned by the entity. Assets are economic resources controlled by an entity. they have some future value to the entity, usually for generating revenue.
To what do the terms liability and equity refer?
A liability is an obligation to pay an asset or to provide services or goods in the future. Until the obligations are paid, creditors have claims against the assets of the entity. Equity represents the amount of assets owing to the owners of the entity. The total assets of an entity belong either to the shareholders or to the creditors.
Explain the term financial transaction. Include an example of a financial transaction as part of your explanation.
The exchange of assets or obligations by a business entity, expressed in monetary terms like dollars, is called a financial transaction. the exchange of cash for land or a building is an example of such a transaction.
Identify the three forms of business organization.
proprietorships, partnership and corporation
What is the business entity concept of accounting? Why is it important?
the business entity concept requires that each economic entity retain separate records. The entity must exist separately from the owners. The concept is important because if the records of the business are mixed up with owners personal records, the accounting information loses its usefulness.
what is the general purpose of financial statements? Name the four financial statements.
financial statements communicate information to external users. The four types are: a balance sheet, income statement, statements of cash flows and statement of changes in equity
Each financial statement has a title that consists of the name of the financial statement, the name of the business, and a date line. How is the date line on each of the four financial statements the same or different?
The date line on the income statement, statement of changes in equity, and statement of cash flows represents a period of time. The income statement details the revenues and expenses that occurred over a given period of time. The statement of changes in equity shows how equity changed over a given period of time. The statement of cash flows shows how the balance in cash changed over a period of time. The date line on the balance sheet is a point in time because each account listed on the balance sheet identifies the account balance on a specific date.
how does an income statement and balance sheet interrelate?
The net income figure in the income statement is added to the retained earnings line item in the balance sheet, which alters the amount of equity listed on the balance sheet. The increase or decrease in net assets of an entity arising from the profit or loss reported in the income statement is incorporated in the balances reported in the balance sheet at the period end.
Define the terms revenue and expense.
Revenue is an increase in an entity’s assets or a decrease in liabilities in return for services performed or goods sold. An expense is an asset belong to the entity that is used up or obligations incurred in selling goods or performing services.
What is net income? What information does it convey?
Net income is the difference between revenues and expenses. It communicates whether the activities of the entity are being conducted profitably. Thus it is one measure of the success of the entity. Net income is one of the criteria used to determine the amount of dividends to be declared.
Why are the financial statements prepared at regular intervals? Who are the users of these statements?
Financial statements are prepared at regular intervals to keep a number of interested groups informed about the financial performance of an entity. The timing is determined in response to the needs of running the entity or of outside parties, such as, shareholders, or others interested in evaluating the progress of the entity. They are generally used as a means to inform investing and lending decisions.
explain double entry accounting
The double entry accounting system reflects the fact that each financial transaction affects at least two items in the accounting equation, in order to maintain the balance of the equation.
What is a year end? How does the timing year-end financial statements differ from that of interim financial statements?
the year end is the last day of the fiscal year for the entity.The income statement, statement of cash flows, and statement of changes in equity reflect financial transactions for the year up to this date. The balance sheet reflects the financial position of the entity at the year-end date. Interim financial statements may be prepared more frequently, say quarterly or monthly; these are prepared for each entity only if required by certain users, usually shareholders of large corporations with many shareholders. Year-end financial statements must be prepared for all entities.
how does a fiscal year differ from a calender year?
A fiscal year refers to a 12-month accounting period and that may not coincide with the calendar year. A company whose fiscal year-end coincides with the calendar year has a December 31 year-end.
