Chapter 1 - Accounting In Action Flashcards
Accounting consists of 3 basic activities- what are they?
Identification
Recording
Communication
A company Identifies?
economic events relevant to its business
Recording in accounting means…
a systematic, chronological diary of events
What is the Sarbanes-Oxley Act (SOX)?
An act passed by Congress to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals.
GAAP
Generally Accepted Accounting Principles - standards indicate how to report economic events
FASB
Financial Standards Accounting Board
IASB
International Accounting Standards Board
IFRS
International Financial Reporting Standards - standards set by IASB
Convergence
Reduction in differences between GAAP & IFRS to make them more comparable.
Relevance
Means that financial information is capable of making a difference in a decision.
Faithful representation
Means that the numbers and descriptions match what really existed or happened- they are factual.
What are the two measurements of GAAP Accounting and why are they useful?
Relevance and faithful representation are two primary qualities that make accounting information useful for decision making.
Historical cost principle
Dictates that companies record assets at their cost.
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).
What are the two main assumptions in accounting?
Monetary Unit Assumption
&
Economic Entity Assumption
What is the Monetary Unit Assumption?
Requires companies include in the accounting records only transaction data that can be expressed in money terms.
What is the Economic Entity Assumption?
It requires that the activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities.
Think Toyota and Lexus.
What is a Proprietorship?
A business owned by one person. The owner receives any profits, suffers any losses, and is personally liable for all debts of the business.
What is a partnership?
A business owned by two or more persons associated as partners.
What is a corporation?
A business organized as a separate legal gal entity under state corporation law and having ownership divided into transferable shares of stock.
What is the formula that represents the basic accounting equation?
Assets = Liabilities + Stockholders Equity
*Liabilities and stockholders equity must equal assets
Claims of those who the company owes money (creditors) are called?
Liabilities
Claims of owners in a company is called?
Stockholders’ Equity
Resources a business owns are called what?
Assets
*the common characteristic of all assets is THE CAPACITY TO PROVIDE FUTURE SERVICES OR BENEFITS.
Claims against assets- that is, existing debts and obligations are known as what?
Liabilities
Merchandise purchased using credit are obligations known as what?
Accounts Payable
- Campus pizza, for instance, purchases cheese, sausage, flour, and beverages on credit from suppliers.
Note Payable
Promissory note to pay as agreed a certain amount of cash.
*Campus pizza has a loan on the truck to the bank.
Who’s claims get paid first- creditors or ownership?
Creditors
The ownership claim on a corporation’s total assets is?
Stockholders’s Equity (common stock & retained earnings)
*it is equal to total assets minus liabilities
Stockholders Equity = Assets - Liabilities
The equity “left over” after creditors’ claims are satisfied is known as what?
Residual Equity
Revenues, expenses, and dividend make up what?
Retained Earnings
Increases in assets or decreases in liabilities resulting from the sale of goods or the performance of services in the normal course of business is known as?
Revenues (sales, fees, services, commissions, interest, dividends, royalties, and rents).
Revenues usually result in an increase in an asset.
The cost of assets consumed or services used in the process of generating revenues is known as what?
Expenses (wages, utilities, rent expense, interest expense, property tax expense, supplies expense, etc)
*They are a decrease in stockholders equity that result in operating the business.
The distribution of cash or other assets to stockholders is called what?
Dividends
*They reduce the earnings, BUT ARE NOT AN EXPENSE.
The system of collecting and processing transaction data and communicating financial information to decision-makers is known as what?
th Accounting Information System
A businesses economic events recorded by accountants are know as what?
Transactions (business transactions)
How is stockholders equity affected by the payment of a liability related to an expenses previously recorders?
It does not affect stockholder equity
- $250 in asset column
- $250 in liabilities column
Your company receives a $600 cash payment from a customer who had previously been billed. How is this transaction recorded?
+$600 cash
-$600 accounts receivable
No change to liabilities or stockholders equity- the revenue was recorded at billing
What increases stockholders equity?
Investments by stockholders
Revenues
What decreases stockholder equity?
Dividends to stockholders
Expenses
What financial statement presents the revenues and expenses and resulting net income or net loss for a specific period of time?
Income Statement
The income statement does not include investment and dividend transactions between stockholders and the business in measuring net income.
What financial statement summarized the changes in retained earnings for a specific period of time?
A retained earnings statement
What financial statement reports the assets, liabilities, and stockholders equity of a company for a specific period of time?
The balance sheet
What financial report summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time?
A statement of cashflows
Reports the cash effects of a company’s operating, investing, and financing activities.
How do you calculate net income?
Revenues less Expenses = Net Income
The balance sheet uses this formula
How do you calculate retained earnings?
Beginning earnings
Add: net income
Less: Dividends
= Retained Earnings
This the retained earnings statement
