Chapter 1: Accounting - The Language of Business Flashcards
1
Q
What is Accounting?
A
The process by which financial info about a business is recorded, classified, summarized, interpreted, & communicated to owners, managers, & other interested parties.
2
Q
What is an accounting system?
A
Designed to accumulate data about a firm’s financial affairs, classify the data in a meaningful way, and summarize it in periodic reports called financial statements.
3
Q
What are financial statements?
A
Periodic reports of a firm’s financial position or operating results.
4
Q
What is a certified bookkeeper (CB)?
A
A professional who has passed the national certified bookkeepers exam and meets experience requirements.
5
Q
What is a public accountant?
A
Members of firms that perform accounting services for other companies
6
Q
What 3 services do public accountants usually offer?
A
- Auditing
- Tax accounting
- Management advisory services
7
Q
What is auditing?
A
The review of financial statements to assess their fairness & adherence to generally accepted accounting principles
8
Q
Who performs financial audits?
A
CPAs (Certified Public Accountants)
9
Q
What is tax accounting?
A
A services that involves tax compliance & tax planning
10
Q
What does compliance consist of?
A
The preparation of tax returns & the audit of those returns
11
Q
What does tax planning consist of?
A
Giving advice to clients on how to structure their financial affairs in order to reduce their tax liability
12
Q
What are Management Advisory Services?
A
Involves helping clients improve their info systems or their business performance
13
Q
What is Managerial Accounting (A.K.A. Private Accounting)?
A
Involves working for a single business in industry
14
Q
Is managerial accounting governmental, private, or public?
A
Private
15
Q
What is Governmental Accounting?
A
Involves keeping financial records & preparing financial reports as part of the staff of federal, state, or local gov units
16
Q
What is internal control?
A
A company’s policies & procedures to safeguard assets, ensure reliability of accounting data, & promote compliance w management policies & applicable laws
17
Q
What is fraud?
A
Intentional to reckless acts that result in confiscation of a firm’s assets or misrepresentation of the firm’s accounting data
18
Q
What does accounting do?
A
Provides financial info about a business or nonprofit org
19
Q
Why do owners, managers, and investors need financial information?
A
To make informed decisions about the business.
20
Q
Accounting is the language of what?
A
Business
21
Q
What does the phrase “Accounting is the language of business” mean?
A
It indicates that accounting communicates financial information crucial for decision-making
22
Q
List three types of financial information a business owner might need.
A
- Cash on hand
- Amounts owed by customers
- Cost of merchandise sold
23
Q
Name two everyday applications of accounting principles.
A
- Creating a personal budget
- Tracking inflows and outflows of funds
24
Q
How does an efficient accounting system benefit business owners and managers?
A
It allows them to quickly obtain a wide range of useful information.
25
What are the primary responsibilities of an accountant?
Establishing records and procedures, supervising the accounting system, interpreting financial information.
26
What are the three main areas of accounting practice?
1. Public accounting
2. Managerial accounting
3.Governmental accounting.
27
What are the largest public accounting firms in the U.S. known as?
"The Big Four" plays a major role in audit, tax, and consulting services.
28
What is required to become a Certified Public Accountant (CPA)?
1. A certain number of college credits in accounting
2. Good character
3. Passing the Uniform CPA Examination
4. And fulfilling state experience requirements.
29
What is the primary function of governmental accounting?
Keeping financial records and preparing reports for government units
30
How do owners and managers use financial information?
To evaluate operations and make decisions for the future
31
What regulatory changes were instituted by the Sarbanes-Oxley Act?
The Act established a Public Company Oversight Board, mandated CEO and CFO certification of financial statements, restricted consulting services to audit clients, and enforced strict penalties for document manipulation and fraud
32
What are the major changes introduced by the Sarbanes-Oxley Act?
Creation of a Public Company Oversight Board, certification of financial statements by executives, and strict penalties for document destruction or fraud.
33
Why do customers pay attention to a firm’s financial information?
To determine the economic health and likelihood of the firm remaining in business
34
How do employees use financial information?
To assess the long-term economic health of their employer, which impacts job security and income
35
What does an Accountant do?
- Establishes the records & procedures that make up an accounting system
- Supervises the operations of the system
- Interprets the resulting financial info
36
What qualifications must a Certified Bookkeeper (CB) achieve?
- Pass the national certified bookkeepers exam
- Adhere to a code of ethics
- And provide evidence of relevant work experience.
37
What financial information is crucial for the successful operation of a business?
Key information includes cash on hand, accounts receivable, cost of goods sold, changes in sales volume, accounts payable, and overall profit or loss.
38
What are the core responsibilities of an accountant within an organization?
Accountants establish accounting records and procedures, supervise the accounting system, interpret financial information, and prepare financial reports
39
Differentiate between the three areas of accounting practice: public, managerial, and governmental
Public accounting involves providing services to multiple clients
Managerial accounting focuses on internal financial management for a single entity
And governmental accounting pertains to managing public sector finances
40
Outline the requirements to become a Certified Public Accountant (CPA)
1. Complete a specified number of accounting credits
2. Demonstrate good character
3. Pass the Uniform CPA Examination,
4. Fulfill state experience requirements.
41
What are the key responsibilities of managerial accountants?
1. Set accounting policies
2. Manage the accounting system
3. Prepare financial statements
4. Provide financial advice
5. Handle tax forms
6. Create internal reports for management.
42
Describe the purpose of governmental accounting and its unique challenges
Governmental accounting is focused on maintaining financial records and reports for government entities, which do not aim to generate profit but must efficiently manage large financial transactions
43
How do owners and managers utilize financial information for decision-making?
They assess operational results, determine pricing strategies, allocate advertising budgets, compare monthly profits, and evaluate potential expansion opportunities.
44
What roles do suppliers, banks, and tax authorities play in the financial information ecosystem?
Suppliers assess a business’s creditworthiness, banks evaluate loan repayment abilities based on financial information, and tax authorities utilize financial data to determine tax liabilities.
45
How do customers evaluate a company's financial health based on financial information?
Customers analyze financial data to ensure the business can remain operational and continue providing products or services
46
In what ways do employees and labor unions leverage financial information?
Employees assess the company's financial stability for job security, while unions use financial data to negotiate better wages and benefits.
47
What are the five key steps in the accounting process?
1. Recording
2. Classifying
3. Summarizing
4. Interpreting
5. Communicating financial information.
48
What is an economic entity in accounting?
A business or organization whose primary purpose is to generate profit for its owners.
49
Define social entities
Social entities are nonprofit organizations that serve public interests
50
What are some examples of social entities?
public schools, cities, and public hospitals.
51
What are the main characteristics of a sole proprietorship?
* Owned by one person
* Ends when the owner can no longer continue
* The owner is personally liable for debts
* Income is reported on the owner’s personal tax return
52
Explain the concept of the "separate entity assumption."
It is crucial to keep business transactions separate from personal transactions to accurately measure business performance.
53
Describe the structure and responsibilities of a partnership
Owned by two or more individuals with a contract outlining contributions, ownership percentages, profit shares, duties, and responsibilities. Partners are liable for business debts, and the partnership dissolves if a partner leaves.
54
What is a Limited Liability Partnership (LLP), and how does it differ from a regular partnership?
An LLP provides limited liability for all partners regarding another partner's actions while maintaining the structure and responsibilities of a typical partnership
55
What defines a corporation as a separate legal entity?
A corporation has its own legal identity, can own property, conduct business, and its owners (shareholders) are not personally liable for corporate debts
56
Differentiate between publicly owned and privately owned corporations.
Publicly owned corporations have shares that are bought and sold on stock exchanges, while privately owned corporations have limited ownership typically within a family or a small group and do not trade shares publicly
57
How is ownership represented in a corporation?
Ownership is represented through stocks, with each share equating to a vote in corporate decisions
58
What is a Subchapter S Corporation (S Corp), and what are its tax benefits?
An S Corp is a corporation that meets certain IRS requirements to be taxed like a partnership, avoiding double taxation while still providing limited liability to its owners
59
Explain the structure and benefits of a Limited Liability Company (LLC)
An LLC combines characteristics of partnerships and corporations, offering limited liability and the flexibility of partnership taxation. It can have unlimited owners and choose its tax treatment
60
What role does the SEC play in financial reporting?
The SEC oversees publicly owned corporations’ financial reporting and can override accounting decisions but delegates standard-setting to the accounting profession
61
What are Generally Accepted Accounting Principles (GAAP)?
GAAP is a set of accounting standards developed to ensure consistency in financial reporting among publicly owned companies
62
Describe the development process of GAAP prior to 2009
GAAP was developed by the Financial Accounting Standards Board (FASB) through discussions, public hearings, exposure drafts, and member voting, resulting in issued standards
63
What significant change occurred in the authoritative sources of U.S. GAAP after July 1, 2009?
The FASB Accounting Standards Codification became the authoritative source, reorganizing accounting pronouncements into 90 topics and providing updates through Accounting Standards Updates.
64
What is the purpose of auditing financial statements?
Auditing provides an independent verification that financial statements fairly present the company's financial position and are in compliance with GAAP.
65
How do internal reports for management differ from external reports?
Internal reports do not have to adhere to GAAP but should provide useful information for monitoring and controlling operations.
66
List the four fundamental assumptions of GAAP
1. Separate entity
2. Going concern
3. Monetary unit
4. Periodicity of income
67
Identify the four main principles of GAAP
1. Historical cost basis
2. Revenue recognition
3. Matching
4. Full disclosure
68
What government organization has the final say & can override decisions on matters of financial reporting by publicly owned corps?
The Securities Exchange Commission (SEC)
69
What is an entity?
Anything having its own separate identity, such as an individual, a town, a university, or a business
70
What is an economic entity?
A business or organization whose major purpose is to produce a profit for its owners
71
What is a social entity?
A nonprofit organization, such as a city, public school, or public hospital
72
What is a Sole Proprietorship?
A business entity owned by one person, who is legally responsible for the debts and taxes of the business
73
What is a partnership?
A business entity owned by two or more people who carry on a business for profit and who are legally responsible for the debts and taxes of the business
74
What is corporation?
A publicly or privately owned business entity that is separate from its owners and has a legal right to own property and do business in its own name; stockholders are not responsible for the debts or taxes of the business
75
What is a creditor?
One to whom money is owed
76
What is a stock?
Certificates that represent ownership of a corporation
77
What are stockholders?
The owners of a corporation; also called shareholder
78
What are the Statements of Financial Accounting Standards?
Accounting principles established by the Financial Accounting Standards Board
79
12. Discussion Memorandum
An explanation of a topic under consideration by the Financial Accounting Standards Board
80
Exposure Draft
A proposed solution to a problem being considered by the Financial Accounting Standards Board
81
Accounting Standards Codification
The source of authoritative U.S. GAAP
82
Accounting Standards Update
Changes to Accounting Standards Codification are communicated through Accounting Standards Update covering approximately 90 topics
83
International Accounting
The study of accounting principles used by different countries
84
Auditor’s report
An independent accountant’s review of a firm’s financial statements
85
