Chapter 1 Accounting and the Business Environment Flashcards
why is accounting important?
its the language of business, is used by decision makers including individuals, businesses, investor, creditors, and taxing authorities. all businesses need accountants
what are the 2 major fields of accounting?
financial accounting and managerial
what are the organizations and rules that govern accounting?
GAAP (Generally Accepted Accounting Principles) are U.S. rules; Financial Accounting Standards Board (FASB)is responsible for the creation and governance of accounting standards
what is economic entity assumption?
requires an organization to be a separate economic entity such as a sole proprietorship, partnership, corporation, or limited-liability company
what is cost principle?
acquired assets and services should be recorded at their actual cost
what is going concern assumption?
assumes that an entity will remain in operation for the foreseeable future
monetary unit assumption
assumes financial transactions are recorded in a monetary unit
what is the accounting equation
assets = liabilities + equity
what are assets?
items the business owns or controls (cash, furniture, land)
what are liabilities?
items the business owns (accounts payable, notes payable, salaries payable)
what is equity?
stockholders’ claims to the assets through contributed capital and retained earnings (common stock, dividends, revenues, expenses)
how do you analyze a transaction?
Step: 1 ID the accounts and account type (asset, liability, equity) Step 2: decide whether each account increases or decreases Step 3: determine whether the accounting equation is in balance
how do you prepare financial statements?
- Income Statement (revenues - expenses = net income/net loss 2. Statement of Retained earnings (beg RE + Net Income - Dividends - net loss = end RE) 3. Balance Sheet (assets = liabilities + stockholder’s equity 4. statement of cash flows (cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities
how do you use financial statements to evaluate business performance?
income statement evaluates profitability; statement of RE studies the amount of earnings that were kept and reinvested in the company; balance sheet details the economic resources the company owns as well as debts the company owes; statement of cash flows shows the change in cash; return on assets (ROA = Net Income / Average total assets)
What is ROA?
return on assets (ROA = Net Income / Average total assets)
