Chapter 1: Accounting in Action Flashcards
What are the 2 types of accounting?
Financial & Management
What are some differences between the 2 types of accounting?
Financial: Used externally egs. banks & investors
Management: Used internally
Define the three accounting activities
Identification, recording and communication
Expand on the three activities
Identification: to select economic events (Transactions)
Recording: to record classify and summarize ( bookkeeping)
Communication: to prepare accounting reports; analyze and interpret for users
Name some examples of internal users
Finance, marketing, HR, management
Name some examples of external users
Investors, predators, taxing authorities, Regulatory Agencies, labour unions
State the accounting building blocks
ethics in financial reporting, accounting standards, measurement principles and assumptions
Name two standard setting bodies
IASB: International Accounting Standards Board - used in 130 countries
FASB : Financial Accounting Standards Board - used mainly by US companies
Name the two accounting standards
IFRS: International Financial Reporting Standards
GAAP: Generally Accepted Accounting Principles
Define convergence of accounting standards
The goal of establishing a single set of international standards
What are the two measurement principles used by the IFRS
Historical Cost Principle: states that companies record assets at their cost, which is true at the time of purchase and over the time it is held
Fair Value Principle: states that assets and liabilities should be reported at the price received to sell an asset or settle a liability
What are the trade offs between the principles?
Relevance: financial information can affect the decision made
Faithful Representation: the numbers and descriptions are factual - match what really happened/ existed
State the two main assumptions
Monetary Unit Assumption: requires that companies include only transactional data that can be expressed momentarily in accounting records
Economic Entity Assumption: requires that the entity, its owner and any other entities’ activities are kept separate and distinct
State the basic accounting equation
Assets= Liabilities+ Equity
Define each component of the accounting equation
Assets: business owned resources
Liabilities: claims against assets egs, debts and obligations
Equity: ownership claim on a company’s total assets
What does the accounting information system do?
Collects and processes transactional data and communicates financial information to decision makers
What does Equity become in the expanded accounting equation?
Capital + returned earnings
additional answer (returned earnings: Revenue - expenses - dividends)
Explain the new components in the expanded equation and their effects on equity
Share Capital - Ordinary: amounts paid by shareholders or owners for ordinary shares purchased; Equity increase
Revenue - income derived from income earning business activities; Equity increase
Expenses - cost of assets consumed/ Services used in earning revenue; Equity decrease
Dividends - the distribution of cash/ other assets to shareholders; Equity decrease
State the financial statements
Income statements, Retained Earning statements, statement of Financial Position, statement of Cash Flows and Comprehensive Income statements
Describe the connections between each financial statements
the net income identified in income statements is needed to calculate the end balance in returned earning statements
the end of balance from returned earning statements is needed to preprare pay the statement of financial position
the cash shown in the statement of financial position is used to prepare statement of cash flows
Breakdown the structure of each financial statement
income statements: list Revenue first then expenses, final line states the net income or loss
return earnings statements:firstly state the beginning returned earnings amounts then add net income or subtract net loss AND subtract dividends & final amount equals the return earnings end balance
statement of financial position: list assets at the top then equity then liabilities
statement of cash flow: state operations, investing activities, financing activities, net increase/ decrease in cash, cash amounts at the end of period
comprehensive income statements immediately follows income statements
