Chapter 1 Flashcards
What is the going concern assumption?
The going concern assumption is the belief that an organization will continue to operate in the foreseeable future, affecting financial reporting.
What types of organizations must adopt International Financial Reporting Standards (IFRS)?
Publicly accountable enterprises are required to adopt International Financial Reporting Standards (IFRS) for their financial reporting.
What does the term ‘dual effect’ refer to in accounting transactions?
The term ‘dual effect’ refers to the principle that each transaction affects at least two accounts in the accounting equation.
What does it mean for a business to have a separate economic entity?
The economic entity concept means that a business’s financial activities are kept separate and distinct from those of its owners or other businesses.
What does the accounting equation represent?
The accounting equation states that Assets = Liabilities + Owner’s Equity, showing the relationship between a company’s resources and the claims against them.
What are the components of owner’s equity?
The components of owner’s equity include investments made by the owner, drawings taken by the owner, and the net profit or loss from business operations.
What events are recognized in financial statements?
Only economic events that cause changes in assets, liabilities, or owner’s equity are recognized in financial statements.
What is the purpose of the cash flow statement?
The cash flow statement summarizes cash inflows and outflows over a specific period, indicating the liquidity of the business.
How do business transactions affect the accounting equation?
Business transactions will have a dual effect on the accounting equation, resulting in a change in assets, liabilities, or owner’s equity.
What is the monetary unit assumption in accounting?
The monetary unit assumption states that only transactions that can be expressed in monetary terms are recorded in the financial statements.
What are the typical order of preparation for financial statements?
Financial statements are typically prepared in the order: Income Statement, Statement of Owner’s Equity, Balance Sheet, and Cash Flow Statement.
What is the purpose of transaction analysis in accounting?
Transaction analysis in accounting identifies, records, and communicates the economic events of an organization, ensuring accurate financial reporting.
Who are the internal users of accounting information?
Internal users of accounting information include finance, marketing, human resources, production, and company officers, who utilize it for planning and managing operations.
What does the term ‘recognition’ refer to in accounting?
Recognition in accounting refers to the process of recording a transaction in the accounting records.
What is the purpose of the statement of owner’s equity?
The statement of owner’s equity summarizes the changes in owner’s equity over a specific time period.
What is the significance of the balance sheet?
The balance sheet reports a company’s assets, liabilities, and owner’s equity at a specific date, providing a snapshot of its financial position.
What are the key components of the balance sheet?
The key components of the balance sheet are assets, liabilities, and owner’s equity.
What is the definition of expenses in the context of the income statement?
Expenses are costs incurred in the process of earning revenues, resulting in a decrease in owner’s equity.
What are the ethical steps to solve ethical dilemmas in accounting?
To solve ethical dilemmas, one should recognize the situation, identify and analyze the ethical issues, consider alternatives, and select the most ethical option.
What are Generally Accepted Accounting Principles (GAAP)?
GAAP are a common set of accounting standards that ensure consistency and transparency in financial reporting.
What is the difference between historical cost and fair value in measurement?
Historical cost is based on the original transaction value, while fair value reflects the current market value and may be more relevant in decision-making.
What constitutes a liability in accounting?
A liability is an obligation arising from past events that requires a future payment of assets or service.
What is the purpose of the income statement?
The income statement presents a company’s expenses, revenues, and profit or loss for a specific period, helping to access financial performance.
What is the relationship between assets, liabilities, and owner’s equity?
Assets are financed by a combination of liabilities (debts owed to creditors) and owner’s equity )the owner’s investment in the business).
