Chapter 1: Flashcards
Which three basic activites does ACCOUNTING consist of
Accounting
- identifes
- records, and
- communicates
the economic events of an organization to interested users
Measurment Principles:
Cost priniciple / Historical Cost Principle
Record asset at their cost
Measurment Principle:
Fair Value Principle
states that assets and liabilites should be reported at fair value (the price received to sell an asset or settle a liability)
Assumption:
Monetary Unit
include in accounting records ONLY transaction data that can be expressed in money terms
Assumption:
Economic Entity
requires that activites of the entity be kept seperate and distinct from the activities of its owner and all other economic entities
Proprietorship
Form of Business Ownership
- Generally owned by one person
- Owner receives any profits, suffers any losses and is personalle liable for all debts
- Often small service-type buisnesses
- dt. Einzelunternehmen
Partnership
Form of Business Ownership
- Owned by two or more persons
- Often retail and service-type buisnesses
- Generally unlimited personal liability
- Partnership agreement
Corporation
Form of Business Ownership
- Ownership divided into shares
- Separate legal entity organizd under corporation law
- Limited liability
The (Basic) Accounting Equation
Asset = Liabilites + Equity
Assets = Liabilited +[Share Capital + Retained Earnings - Dividends + Revenues - Expenses]
_________________________
Equity = Assets - Lianilities
Assets
- Resources a business owns
- Provide future service or benefits
- Cash, Inventory, Equipment etc.
Liabilites
- Claims against assets (debts and obligations)
- Creditors - party wo whom money is owned
- Accounts payable, Notes Payable etc
Equity
- Ownership claim on total assets
- Referred to as residual equity
- Accounts:
- Share capital ordinary
- retaind earnings
Equity Increases / Decreases
- Revenue
- Expenses
- Investment by shareholders
- Dividends to shareholders
- Revenue -> INCREASES
- Expenses -> DECREASES
- Investment by shareholders -> INCREASES
- Dividends to shareholders -> DECREASES
Dividends
- Is the distribution of cash or other assets to shareholders
- Reduc retained earnings
- NOT AN EXPENSE!!!!!
Retained Earnings
= Revenues - Expenses - Dividends
= Net Income - Dividends
Share Capital-Ordinary
“Grundkapital” bzw. “Gezeichnetes Kapital”
Investment by shareholders
How many finacial statments are being prepared by Companies
- Income Statement
- Retained Earnings Statement
- Statement of Financial Position
- Statement of Cash Flow
- Comprehensive income statement
Name the primary accounting standard-setting bodies
Financial Accounting Standards Board
Internationational Financal Reporting Standards
Financial Statements
Period of Time or specific Date
Period of Time:
- income statement
- retained earnings statement
- statement of cash flow
- comprehensive income
Specific point in time:
- statement of financial position
Comprehensive income statement
- presents other comprehensive income items thate are NOT included in the determination of net Income
Statement of Cash Flow
Name the three Cash Flows
- Cash Flow from operating activites
- cash reciepts from revenues
- cash payments from revenues
- Cash Flow from investing activities
- purchases of equipment
- Cash Flow from financing activities
- sale of ordinary shares
- Payment of cash dividends
Name the Measurement Principles
1. Cost Principle (Historical Cost Principle):
- companies record assets at their COST
2. Fair Value Principle
- states that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability)
In determining which measurement Principle to use, teh factual nature of cost figrue are weighted versus the relevance of fair value. -> reelevance and faithful representation
