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Accounting 110 > Chapter 1: Accounting In Action > Flashcards

Chapter 1: Accounting In Action Flashcards

1
Q

What is accounting?

A

The system that identifies, records, and communicates the economic events of an organization to a variety of interested users

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2
Q

What is the accounting process?

A

1) A company identifies the economic events relevant to its business

2) Records the economic events in a chronological order to provide a history of its financial activities

3) Communicates the financial info to interested users through the preparation of financial statements

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3
Q

What are financial statements?

A

Financial statements report the recorded data in a standardized way to make the information meaningful

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4
Q

What is analysis?

A

Analysis involves using ratios, percentages, and data visualization to highlight significant financial trends and relationships

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5
Q

What is interpretation?

A

Interpretation involves explaining the uses, meaning, and limitations of reported data

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6
Q

Who are internal users?

A

Internal users plan, organize and run companies. They work for the company

e.g. Finance Directors, Marketing Managers, Human Resource Personnel, Production Supervisors, Company Officers

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7
Q

What do internal users do?

A

Internal users have direct access to the business’ accounting info and are able to request a wide variety of custom reports designed for their needs

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8
Q

What are some examples of information that internal users need?

A
  1. Forecasts of cash flows for the next year
  2. Projections of profit from new sales campaigns
  3. Analyses of salary costs and budgeted financial statements
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9
Q

Who are external users?

A

External users are individuals or organizations outside of a company who want financial information about the company

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10
Q

Who are the two most common external users?

A

Investors and creditors

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11
Q

What are investors?

A

Investors are individuals who are owners - or potential owners of the business that use accounting info to make decisions for their investments

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12
Q

What are creditors?

A

Creditors are individuals or other businesses that a company owes money to that use accounting info to evaluate the risk of granting credit ( lending money )

e.g bankers and suppliers

The law requires that creditor claims be paid before ownership claims are paid

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13
Q

What do external users only have access to with regards to accounting information?

A

External users only have access to accounting info that is public or provided to them by the business

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14
Q

What is the main objective of financial reporting?

A

The main objective of financial reporting is to provide useful information to existing and potential investors and creditors (external users) to make decisions about providing resources to a business

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15
Q

What do users need information on about the business?

A

Users need info about the business’ ability to earn a profit and generate cash

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16
Q

What do financial statements must give information on?

A

1) The business’ economic resources (assets)

2) The claims to the business’ economic resources (liabilities)

3) The economic performance (Is the business generating a profit?)

4) Management’s stewardship

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17
Q

What is a sole proprietorship?

A

A business owned by one person. The owner is usually the operator of the business.

e.g. small service businesses, small retail stores

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18
Q

What is unlimited liability?

A

The principle that states owners of a business are personally
liable for all debts of the business

e.g. proprietorships, partnerships

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19
Q

What are some facts about sole proprietorships?

A
  • They have unlimited liability
  • Often a relatively small amount of money (capital) is needed to start one
  • There is no legal distinction between the business as an economic unit and owner
  • The life of a proprietorship is limited to the life of the owner
  • The profits of the business are reported and taxed on the owner’s personal income tax return
  • The records of the business’ activities are kept separate from the personal records and activities of the owner
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20
Q

What is a partnership?

A

A business owned by two or more persons who are associated as partners. It is often used to organize service-type businesses, including professional practices

(i.e. lawyers, doctors, architects, accountants)

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21
Q

What do partnership agreements define?

A
  • The initial investments of each partner
  • How profit will be divided
  • What the settlement will be if a partner dies or withdraws
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22
Q

What are some facts about partnerships?

A

Each partner generally has unlimited liability for all debts of the partnership

Partners’ share of the profit must be reported and taxed
on the partner’s personal income tax returns

Partnership business activities must be kept separate from
personal activities of each partner

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23
Q

What is a corporation?

A

A business that is organized (incorporated) as a separate legal entity under federal, provincial, or territorial corporate law

e.g. Limited (LTD), Incorporated (Inc), Corporation (Corp)

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24
Q

What are some facts about corporations?

A
  • Corporations can have one or more owners
  • Ownership is divided into transferrable shares
  • Corporations have unlimited life
  • Responsible for its own debts and for paying taxed on its profit
  • Provide shareholders with limited liability
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25
Q

What is a service business?

A

A service business provides services rather than products to customers

e.g. barber

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26
Q

What is a merchandising business?

A

A merchandising business purchases products from other businesses and sells these products to customers

e.g. Walmart

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27
Q

What is a manufacturing business?

A

A manufacturing business changed basic inputs into products that are sold to customers

e.g. Toyota

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28
Q

What is the generally accepted accounting principles (GAAP)?

A

Generally accepted accounting principles represent broad principles, procedures, concepts and standards that act as guidelines for accountants. It helps guide the reporting of economic events

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29
Q

What is ethics with regards to financial reporting?

A

Ethics is the standards of conduct by which actions are judged as right or wrong, honest or dishonest, fair or not

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30
Q

What is considered ethical?

A
  • An individual’s actions are both legal and responsible
  • They consider the organization’s interests when they make decisions
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31
Q

How do you analyze ethics cases and situations?

A
  • Identify the ethical issues involved
  • Identify the stakeholders - person or groups that mail benefit or face harm
  • Consider alternative courses of action and consequences for stakeholders
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32
Q

What do fundamental qualitative characteristics include?

A

Relevance and faithful representation

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33
Q

What is relevance?

A

Making a difference in a business decision

34
Q

What is faithful representation?

A

Information that accurately depicts what really happened. Info must be complete, neutral, and free from error

35
Q

What do enhancing qualitative characteristics include?

A

Comparability, verifiability, timeliness, and understandability

36
Q

What is comparability?

A

Accounting info should be consistent so that the info can be compared to other companies

37
Q

What is verifiability?

A

Independent observers, using the same methods obtain similar results

38
Q

What is timeliness?

A

Info must be available to decision makers before losing its capacity to influence decisions

39
Q

What is understandability?

A

Info that is presented in a clear and precise way for others to interpret and comprehend

40
Q

What is recognition in accounting?

A

The process of recording transactions in the accounting records

41
Q

How do you recognize revenue?

A

It must meet a performance obligation

42
Q

What is a performance obligation?

A

The obligation of a business to perform a service or deliver goods to a customer

43
Q

What is the matching concept?

A

The accounting concept that prescribed when a cost incurred by a business should be recognized as an expense

44
Q

What is the monetary unit concept?

A

A concept that states that only transaction data that can be expressed as an amount of money may be included in the accounting records

45
Q

What is the revenue recognition principle?

A

The principle that guides the recognition of revenue when a performance obligation is satisfied, not when cash is exchanged

46
Q

What is the reporting entity concept?

A

The concept that a reporting entity’s activities should be kept separate and distinct from the economic activities of its owner and all other reporting entities

47
Q

What is the going concern assumption?

A

The assumption that the reporting entity will continue to operate in the foreseeable future

48
Q

Why is the going concern assumption one of the most important assumptions in GAAP?

A
  • It has implications regarding what info is useful for decision makers (e.g. land)
  • It affects many accounting standards
49
Q

What is the periodicity concept?

A

The accounting concept that guides organizations in dividing up their economic activities into distinct time periods

e.g. months, quarters, years

50
Q

What is measurement?

A

The process of determining the amount that should be recognized

51
Q

What is historical cost?

A

An accounting concept that states that assets should be recorded at their historical (original) cost

52
Q

What are the advantages of historical cost?

A
  • It is definite and verifiable
  • It provides reliable info for users
53
Q

What is fair value?

A

Generally the amount the asset could be sold for in the market assuming the company is a going concern, not the amount that a company would receive in an involuntary liquidation

54
Q

What is a reporting entity?

A

An entity that is required, or chooses to prepare financial statements

  • A reporting entity can be any organization or unit in society, that is, it does not have to be a legal entity
  • Financial statements should include info that is both relevant and faithfully represented
55
Q

What is the Accounting Standards Board (AcSB)’a most important criteria for accounting standards?

A

The standard should lead to external users having the most useful financial info possible when they are making decisions

56
Q

What is the international financial reporting standards (IFRS)?

A

A set of global standards developed by the International Accounting Standards Board used for financial reporting, mostly by publicly accountable enterprises but also by certain private entities

57
Q

What are publicly accounted enterprises?

A

Publicly traded companies, as well as securities brokers and dealers, bankers, and credit unions, whose role is to hold assets for the public as part of their primary business

58
Q

What is the Accounting Standards for Private Enterprises (ASPE)?

A

A set of standards developed by the Accounting Standards Board that may be used for financial reporting by private enterprises in Canada

59
Q

Why are financial statements prepared?

A

Financial statements are prepared mainly to provide info to external users

60
Q

What financial statements do all businesses must prepare?

A

Balance sheet and income statement

61
Q

What is an account?

A

An individual accounting record of increases and decreases in a specific asset, liability, or owner’s equity item

62
Q

What is a balance sheet?

A

A snapshot of the company’s financial condition at a specific point of time

63
Q

What does a balance sheet provide users?

A

A balance sheet provides users with info on economic resources that the business can use to carry out its business activities and claims on these economic resources

64
Q

What are assets?

A

Present economic resources controlled by a business as a result of past events and have the potential to produce economic benefit

65
Q

What are accounts receivables?

A

The asset created when a company sells goods or services to customers who promise to pay cash in the future

66
Q

What are prepaid expenses?

A

The asset created when a business pays cash in advance for goods or services that will be used over time

(e.g. insurance, rent, supplies)

67
Q

What is a liability?

A

Present obligations, arising from past events, the settlement of which will include the transfer of economic resources

68
Q

What is accounts payable?

A

An obligation to pay cash to suppliers in the future

69
Q

What is notes payable?

A

When a business borrows money to purchase something. It is supported by a written promise to pay a specific amount, at a specific time in the future

70
Q

What is unearned revenue?

A

When a customer pays a business in advance of being provided with a service or product

71
Q

What is owner’s equity?

A

The owner’s claim on the assets of the company. It is equal to total assets minus total liabilities

72
Q

What is the term that is used to describe when equity is negative - if total liabilities are more than assets?

A

Owner’s deficiency or deficit

73
Q

What is the income statement?

A

A financial statement that presents the revenues and expenses and resulting profit (or loss) for a specific period of time

74
Q

What is the main purpose of the income statement?

A

The main purpose of the income statement is to report the economic performance of the businesses’ operations over a specific period of time

75
Q

What are revenues and what do they result in?

A

Revenues result from business activities that are undertaken to earn profit.

It results in an increase in assets and owner’s equity, and a decrease in liability

76
Q

What are expenses and what do they result in?

A

The costs of assets that are consumed and services that are used in a company’s business activities

Expenses result in an increase in liabilities and owner’s equity and a decrease in assets

77
Q

What is the statement of owner’s equity?

A

It reports the changes in owner’s equity for the same period of time as the income statement

78
Q

What are investments?

A

Contributions of cash or other assets made by the owner to the business

79
Q

What are drawings?

A

Withdrawals of cash or other assets from an unincorporated business for personal use

80
Q

What is the cash flow statement?

A

It gives info about the cash receipts and cash payments for a specific period of time

Accounting 110 (11 decks)

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