Chapter 1 Flashcards
Sarbanes-Oxley Act
pass in 2002, CEO & CFO must certify financial statements
Financial Accounting
concerns the preparation and use of the accounting information provided in a company’s financial statements
Managerial Accounting
focuses on the production of accounting information internal to a firm for deciding operations
Tax Accounting
system of measurement used by tax authorities to determine the amount of taxes to levy on a company
Accounts receivable
the amount a company expects to receive from its customers from prior purchases
Accounts payable
the amount that a company expects to pay to its suppliers for purchases on credit
Accrual basis
recording the financial effects of a business transaction even though the timing of the cash effects take place at a different time
Cash basis
financial effects of a transaction are recorded only when the cash effect of the transaction occurs
Income Statement
Profit & Loss, The income statement is important because it shows the profitability of a company during the time interval specified in its heading. The period of time that the statement covers is chosen by the business and will vary. For example, the heading may state:
“For the Three Months Ended December 31, 2012” (The period of October 1 through December 31, 2012.)
“The Four Weeks Ended December 27, 2012” (The period of November 29 through December 27, 2012.)
“The Fiscal Year Ended June 30, 2013” (The period of July 1, 2012 through June 30, 2013.)
Keep in mind that the income statement shows revenues, expenses, gains, and losses; it does not show cash receipts (money you receive) nor cash disbursements (money you pay out).
Going-Concern Assumption
financial statements are prepared assuming that a business will continue operating in the future
Statement of Cash Flow
Reports cash generated and obtained from operations, financing and investing during a time interval
Balance Sheet
“snapshot” of the company’s financial position at a point A=L+SE
Assets
resources of a company that are expected to provide future economic benefit
Liabilities
the value of the company’s obligations to repay monies loaned to it, to pay for goods or services received or to fulfill commitments
Shareholder’s Equity
the difference between a company’s assets and liabilities, represents shareholder’s financial stake
Statement of Shareholder’s Equity
captures decision by summarizing the detailed reason for the change in each shareholder’s equity account
Decision Usefulness
accounting information is used by managers, creditors and investors to make decisions
Relevance
the capacity of accounting information to influence a decision
Faithful representation
accounting information is free from error or biaz
materiality
disclosure criterion used to decide what and how much information to provide on financial statements
Footnotes
space to provide details about their accounting methods and measures
lemons problem
management makes judgement about what their products are worth
Audit Report
third party audit firms provide assurance of the faithful representation of the financial statements of the companies they audit
Generally Accepted Auditing Standards
rules for audit firm procedures
Generally Accepted Accounting Principles
generally accepted accounting procedures
Expected return
expected income to be earned on investment
Riskiness
uncertainty associated with the expected return
Financial Accounting Standards Board
responsible for establishing GAAP
GAAP rules for Mortgage Backed Securities & Credit Default Swaps
fair values are important to investors, evaluating illiquid markets only added to banking crisis
Supply of Capital
allocating funds across different investment opportunities
Demand for Capital
unfunded investment opportunities
Capital Market
marketplace where funds are traded between suppliers of capital and firms in search of capital
Efficient Market
a market in which security prices correctly reflect all publicly available information
debt covenant
debtholder putting formal restrictions on the dollar value and ratios derived from financial statements
Agency Cost
Two parties have different interests and the agent has more information, the principal cannot directly ensure that its agent is always acting in the principal’s best interests.
American Institute of Certified Public Accountants
The national professional association of certified public accountants in the US
Comparability
A quality of accounting information that facilitates the comparison of financial reporting of one company to the financial reporting of another company.
Comprehensive income
a statement of all income and expenses recognized during a period. The statement includes revenue, finance costs, tax expenses, discontinued operations, profit share and profit/loss.
Conservatism
when recording an economic event, the one that is realistic (may be less favorable) should be adopted.
Consolidated income statement
financial statements prepared to reflect the parent company and its wholly or majority-owned subsidiaries
Contracting role
when accounting information is used to administer contract terms
corporate Charter
written document filed with a U.S. state by the founders of a corporation detailing the major components of a company such as its objectives, its structure and its planned operations.
Corporate governance
balancing the interests of the many stakeholders in a company - these include its shareholders, management, customers, suppliers, financiers, government and the community
Corporations
a business enterprise owned by one or more owners (shareholders) that has a legal identity separate and distinct than of its owners.
Covenants
A promise in a loan, or any other formal debt agreement, that certain activities will or will not be carried out
distribution to owners
payment of earnings to owners of a business organization in the form of a dividend
economic entity
the recorded activities of a business entity will be kept separate from the recorded activities of its owner(s) and any other business entities.
equity
a claim against the assets of a company by creditors or the shareholders
expenses
an outflow of assets, an increase in liabilities or both from transactions involving an enterprise’s principal business activity
financial accounting foundation
It was organized in 1972 as a non-stock, Delaware Corporation. It is an independent organization in the private sector, operating with the goal of ensuring objectivity and integrity in financial reporting standards.
fiscal period
any continuous period, usually beginning after a natural business peak
gains
an increase in asset values, usually involving a sale (realized) or revaluation (unrealized), unrelated to principal revenue producing activity of a business
information role
complementary relationship between reputation and accounting information
international accounting standards board
An association of professional accounting bodies formed in 1973 to develop and issue international accounting and reporting standards
international financial reporting standards
the accounting and reporting standards adopted and promulgated by the IASB
investments by owner
Stockholder investments
limited liability
the concept that shareholders in a corporation are not help personally liable for its losses and debts
losses
the excess of expense over revenues for a single transaction
monetary unit
Accounting is recorded in US dollar and assumed to remain constant over time
public company accounting oversight board
is a private-sector, nonprofit corporation created by the Sarbanes–Oxley Act of 2002 to oversee the audits of public companies and other issuers in order to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports
revenues
the inflow of assets, reduction in liabilities or both from transactions involving an enterprise’s principal business activity
Security and exchange commmission
A government agency responsible for the oversight of US securities markets; this agency specifies the form and content of all financial reports by companies issuing securities to the public.
