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Financial Accounting > Chapter 1 > Flashcards

Chapter 1 Flashcards

1
Q

Financial Accounting

A

Concerns the preparation and use of the accounting information provided in a company’s financial statements.

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2
Q

The overall objective of Financial Accounting

A

Is to provide a basis upon which to evaluate the financial position and performance of a company for those that have invested in the company

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3
Q

Managerial Accounting

First financial accounting measurement

A

Focuses on the production of accounting information internal to a firm for deciding such operational questions as how much inventory to produce, what price to charge and measure performance

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4
Q

Tax Accounting

Second financial accounting measurement

A

Refers to the system of measurement used by tax authorities to determine the amount of taxes to levy on a company

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5
Q

Four Primary Financial Statements

A

1) Balance Sheet
2) Income Statement
3) Statement of cash flow
4) Statement of Shareholders equity

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6
Q

Balance Sheet

A

Shows what resources the company currently has and who provided the financing to acquire the various resources

1) Assets
2) Liabilities
3) Equity

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7
Q

Assets

Balance Sheet

A

Refer to the resources of a company that are expected to provide future economic benefit

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8
Q

Liabilities

Balance Sheet

A

Represent the value of the company’s obligations to repay monies loaned to it, to pay for goods or services received by it, or to fulfill commitments made by it

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9
Q

Shareholders equity

Balance Sheet

A

The difference between a companies assets and liabilities represents the shareholders financial stake in a company

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10
Q

Basic Accounting Equation

A

Assets = Liabilities + Shareholders Equity

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11
Q

Accounts Receivables

Balance Sheet

A

Asset - The amount that the company expects to receive from its customers for prior purchases

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12
Q

Accounts Payables

Balance Sheet

A

Liabilities - The amount a company expects to pay to its suppliers for prior credit purchases of inventory

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13
Q

Accrual basis of accounting

A

This approach requires a company to record the financial effects of a business transaction even though the timing of the cash effects of the event takes place at a different time

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14
Q

Income Statement

A

Reports how much merchandise the company sold and how much profit, if any, it made from those sales

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15
Q

Bottom Line

Income Statement

A

Net Income - How much the company made or lost

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16
Q

Going Concern Assumption

A

This notion specifies that financial statements are prepared assuming that a business will continue operating in the future unless there is a substantial evidence to the contrary

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17
Q

Statement of cash flow

A

Tells us how much cash a company generated from its core business operations versus received from its shareholders and debtholders, and how much is spent to buy its long-term assets, such as software and equipment

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18
Q

Why are investors usually very interested in the Statement of cash flow?

A

Because it provides insight into a business beyond that provided by the balance sheet which reflects a company’s current financial heal, or an income statement which depicts a firms recent operating performance

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19
Q

Statement of shareholders equity

A

It reveals how the shareholders investment in a business grew by the amount o any net income retained in the business or declined as a consequence of any dividend distribution to shareholders or any loss sustained by a business

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20
Q

Decision Usefulness

Qualitative Attributes of Accounting Information

A

Decide Price of product to charge, bank credit, decision to invest in shares and at what price

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21
Q

Relevance

First attribute that underlies accounting information

A

Refers to the capacity of accounting information to influence a decision

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22
Q

Feedback Value

Second attribute that underlies accounting information

A

Pertains to decisions and actions already taken

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23
Q

Predictive Value

A

Suggests that accounting information helps financial statement users for predictions about future outcomes

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24
Q

Faithful Representation

A

Refers to the fact that accounting information is, or should be, free from error or bias

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25
Q

GAAP

A

Generally Accepted Accounting Principles - Provide guidance to companies regarding the preferred way to measure and report their performance

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26
Q

Footnotes

A

A way for companies to provide details about their accounting methods and how the various accounts are measured
Example: Inventory is primarily accounted for using the first-in, first -out method

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27
Q

Audit Report

A

Audit firms work hard to provide assurance because errors in detecting defective financial statements can result in significant lost of investors capitol

28
Q

SEC

A

Securities Exchange Commission - Created after the Stock Market Crash during the Great Depression. Sets standards

29
Q

Risk and Expected Return

A

Return - expected income to be earned
Riskiness - refers to the uncertainty associated with the expected return
- Risk and Return are positively correlated. Higher risk = Higher Reward

30
Q

Supply of Capital

A

The portfolio decisions of millions of individuals and businesses in allocating funds across different investment opportunities

31
Q

Go Public

A

Sell ownership shares i the public capital market as a means to gain access to capital to grow, to provide original investors with “liquidity” (ability to sell their ownership assets) and to have shares to be used to facilitate future mergers and acquisitions

32
Q

Raise Funds

A

Obtain capital by issuing shares to shareholders and/or by borrowing from creditors such as financial institutions and bond investors.

33
Q

Return on Investment

A

Derived from dividend payments and any appreciation or depreciation experienced from changes in a company’s share price

34
Q

Data Analytics

A

Defined as the science of gatherings and analyzing raw data and then using the results to make better decisions

35
Q

Big Data

A

A specific form of data analytics is the examination of enormous amounts of data to help the analyst uncover hidden patterns, correlations and other insights

36
Q

FinTech

A

Any new technology that seeks to improve and automate the delivery and use of financial services

37
Q

Blockchain

A

An evolving record of data that is managed by a multitude of different users and computers, together not owned or managed by any single entity.
Example: Bitcoin

38
Q

GAAP are a set of rigid rules that if followed correctly, will lead to a correct representation of the financial performance and healthy of a firm
(Accounting Myth 1)

A

False - A certain amount of flexibility exists within GAAP

39
Q

GAAP is created from a comprehensive analytical process, which is free from political influence
(Accounting Myth 2)

A

False - Politics can affect accounting

Example: Enron, Great Depression

40
Q

The basic financial statements, consisting of a balance sheet, an income statement, a statement of shareholders equity and cash flow, reflect a complete, accurate and timely portrayal of the financial performance and well being of a firm
(Accounting Myth 3)

A

False

41
Q

All of a firms identifiable assets and liabilities appear on the balance sheet, and the difference between a firms assets and its liabilities represents the value of the firm
(Accounting Myth 4)

A

False

42
Q

Each of the financial statements is independent, with each reflecting a different aspect of a firms performance and financial health
(Accounting Myth 5)

A

False

43
Q

Cash Flow is ultimately what matters to firm and its investors
(Accounting Myth 6)

A

False

44
Q

A knowledge of accounting is necessary only for someone who wants to be an accountant
(Accounting Myth 7)

A

False

45
Q

Corporations

A

Owned by shareholders under the laws of the state or province in which a company is incorporated

46
Q

Corporate Charter

A

Set of bylaws governing the rights and responsibilities of the board of directors to a firms shareholders and covering such topics as annual meetings, the election of directors, the type of shares to be sold and voting rights

47
Q

Conflicts between managers and shareholders

A

Incentivize contract work to align the financial interests of managers with those of a company’s stockholders, thereby encouraging the managers to simultaneously work to maximize their own wealth as well as shareholders

48
Q

Conflict between debtholders and shareholders

A

Shareholders re-distribute the borrowed wealth rom the debtholder’s to themselves, potentially leaving the debtholders with a worthless corporate shell and no resources to repay the loan

49
Q

Fiscal Periods

A

Segment its operational life into reporting periods. Provides interested parties with a timely, relevant information about its various activities

50
Q

10-Q

A

Public corporations that report to the SEC quarterly financial statements

51
Q

10-k

A

Public corporations that report to the SEC Annual financial statements

52
Q

Assets

A

Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events
Includes: Cash, stocks, bonds, and real estate

53
Q

Liabilities

A

Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions
Includes: Car loans, credit card debt, student loans, mortgages

54
Q

Equity

A

The residual interest in the assets that remain after deducting its liabilities

55
Q

Revenues

Income Statement

A

Inflows or other enhancements of assets to an entity or settlement of its liabilities from delivering or producing goods, services or carrying out other activities that constitute the entity’s purpose

56
Q

Expenses

Income Statement

A

Outflows or other using up of assets r incurrences of liabilities from delivering or producing goods, services or carrying out activities

57
Q

Gains

Income Statement

A

Increases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and events affecting the entity except those that result from revenues or investments by owners

58
Q

Losses

Income Statement

A

Decreases in equity from peripheral or incidental transactions of an entity and from all other transactions and events affecting the entity except those that result from revenues or investments by owners

59
Q

Comprehensive Income

Income Statement

A

The change in equity of a business enterprise during a period from transactions and other events from sources other than investments by owners or distribution to owners

60
Q

Investment by owners

Transfers between a business and its owners

A

Increase in equity of a particular business enterprise resulting from transfers to it for the purpose of increasing ownership interests

61
Q

Distributions to owners

Transfers between a business and its owners

A

Decreases in the equity of a particular business enterprise resulting from transferring assets, rendering services or incurring liabilities to owners

62
Q

Net Worth

A

A - L = NW

Simply the difference between what you have and what you owe

63
Q

SE

A

Share Equity

64
Q

CS

A

Common Stock

65
Q

RE

A

Retained Earnings

66
Q

Balance Sheet Equation

A

A = L + (CS + RE)

Financial Accounting (11 decks)

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