Chapter 1 Flashcards
What are assets?
Assets are something a business owns or controls, such as cash, inventory, land, plant, and machinery.
What are liabilities?
Liabilities are obligations a business owes to others, such as creditors and bank loans.
What is equity?
Equity represents the owners’ claim on assets after liabilities have been deducted. It includes stockholders’ equity and retained earnings.
Define revenue and expenses.
Revenue: The income earned from selling goods or services.
Expenses: The costs incurred to generate revenue.
What are retained earnings?
Retained earnings are the profits a company has accumulated over time after paying dividends to shareholders.
What is the accounting equation?
Assets = Liabilities + Stockholder’s Equity
What are the three main types of businesses?
Service businesses – Provide services rather than products (e.g., Delta Air Lines).
Merchandising businesses – Sell products they purchase from others (e.g., Amazon).
Manufacturing businesses – Change raw materials into products for sale (e.g., Dell).
What is managerial vs. financial accounting?
Managerial accounting: Provides information for internal users (managers).
Financial accounting: Provides financial reports for external users (investors, banks).
What are ethics in accounting?
Ethics are moral principles that guide conduct in business and accounting.
What is the Sarbanes-Oxley Act?
A U.S. law that established new regulations for corporate responsibility, financial disclosure, and auditor independence.
What is GAAP?
GAAP (Generally Accepted Accounting Principles) is a set of accounting standards, principles, and assumptions that govern financial reporting.
What are accounting standards?
Rules that determine how business transactions are recorded.
What is the Financial Accounting Standards Board (FASB)?
The primary organization responsible for developing U.S. accounting standards.
What is the role of the SEC (Securities and Exchange Commission)?
A government agency that oversees financial disclosures and protects investors.
What is the International Accounting Standards Board (IASB)?
The global organization responsible for developing International Financial Reporting Standards (IFRS).
What are the two essential characteristics of useful financial reports?
Relevance – Information must impact decision-making.
Faithful representation – Information should be accurate and free from bias.
What are the four fundamental GAAP assumptions?
Monetary unit assumption – Financial records use a common currency.
Time period assumption – Business activities are divided into reporting periods.
Business entity assumption – The business is separate from its owners.
Going concern assumption – The business is expected to continue operating.
What is the measurement principle?
Determines the amount that will be recorded and reported. An amount is objective if it is based upon independent, unbiased evidence. An amount is verifiable if it can be comfirmed by a third party. Transactions between 2 independent parties (arm’s-Lenght transactions), provide amounts that are objective and verifiable
What is the revenue recognition principle?
Revenue should be recorded when it is earned, not when cash is received.
