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Fundamentals of Accounting > Chapter 1: Accounting - The Language of Business > Flashcards

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.

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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.

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3
Q

What are financial statements?

A

Periodic reports of a firm’s financial position or operating results.

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4
Q

What is a certified bookkeeper (CB)?

A

A professional who has passed the national certified bookkeepers exam and meets experience requirements.

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5
Q

What is a public accountant?

A

Members of firms that perform accounting services for other companies

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6
Q

What 3 services do public accountants usually offer?

A
  1. Auditing
  2. Tax accounting
  3. Management advisory services
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7
Q

What is auditing?

A

The review of financial statements to assess their fairness & adherence to generally accepted accounting principles

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8
Q

Who performs financial audits?

A

CPAs (Certified Public Accountants)

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9
Q

What is tax accounting?

A

A services that involves tax compliance & tax planning

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10
Q

What does compliance consist of?

A

The preparation of tax returns & the audit of those returns

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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

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12
Q

What are Management Advisory Services?

A

Involves helping clients improve their info systems or their business performance

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13
Q

What is Managerial Accounting (A.K.A. Private Accounting)?

A

Involves working for a single business in industry

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14
Q

Is managerial accounting governmental, private, or public?

A

Private

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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

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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

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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

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18
Q

What does accounting do?

A

Provides financial info about a business or nonprofit org

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19
Q

Why do owners, managers, and investors need financial information?

A

To make informed decisions about the business.

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20
Q

Accounting is the language of what?

A

Business

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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

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22
Q

List three types of financial information a business owner might need.

A
  1. Cash on hand
  2. Amounts owed by customers
  3. Cost of merchandise sold
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23
Q

Name two everyday applications of accounting principles.

A
  1. Creating a personal budget
  2. Tracking inflows and outflows of funds
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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.

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25
Q

What are the primary responsibilities of an accountant?

A

Establishing records and procedures, supervising the accounting system, interpreting financial information.

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26
Q

What are the three main areas of accounting practice?

A
  1. Public accounting
  2. Managerial accounting
    3.Governmental accounting.
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27
Q

What are the largest public accounting firms in the U.S. known as?

A

“The Big Four” plays a major role in audit, tax, and consulting services.

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28
Q

What is required to become a Certified Public Accountant (CPA)?

A
  1. A certain number of college credits in accounting
  2. Good character
  3. Passing the Uniform CPA Examination
  4. And fulfilling state experience requirements.
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29
Q

What is the primary function of governmental accounting?

A

Keeping financial records and preparing reports for government units

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30
Q

How do owners and managers use financial information?

A

To evaluate operations and make decisions for the future

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31
Q

What regulatory changes were instituted by the Sarbanes-Oxley Act?

A

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

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32
Q

What are the major changes introduced by the Sarbanes-Oxley Act?

A

Creation of a Public Company Oversight Board, certification of financial statements by executives, and strict penalties for document destruction or fraud.

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33
Q

Why do customers pay attention to a firm’s financial information?

A

To determine the economic health and likelihood of the firm remaining in business

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34
Q

How do employees use financial information?

A

To assess the long-term economic health of their employer, which impacts job security and income

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35
Q

What does an Accountant do?

A
  • Establishes the records & procedures that make up an accounting system
  • Supervises the operations of the system
  • Interprets the resulting financial info
36
Q

What qualifications must a Certified Bookkeeper (CB) achieve?

A
  • Pass the national certified bookkeepers exam
  • Adhere to a code of ethics
  • And provide evidence of relevant work experience.
37
Q

What financial information is crucial for the successful operation of a business?

A

Key information includes cash on hand, accounts receivable, cost of goods sold, changes in sales volume, accounts payable, and overall profit or loss.

38
Q

What are the core responsibilities of an accountant within an organization?

A

Accountants establish accounting records and procedures, supervise the accounting system, interpret financial information, and prepare financial reports

39
Q

Differentiate between the three areas of accounting practice: public, managerial, and governmental

A

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
Q

Outline the requirements to become a Certified Public Accountant (CPA)

A
  1. Complete a specified number of accounting credits
  2. Demonstrate good character
  3. Pass the Uniform CPA Examination,
  4. Fulfill state experience requirements.
41
Q

What are the key responsibilities of managerial accountants?

A
  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
Q

Describe the purpose of governmental accounting and its unique challenges

A

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
Q

How do owners and managers utilize financial information for decision-making?

A

They assess operational results, determine pricing strategies, allocate advertising budgets, compare monthly profits, and evaluate potential expansion opportunities.

44
Q

What roles do suppliers, banks, and tax authorities play in the financial information ecosystem?

A

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
Q

How do customers evaluate a company’s financial health based on financial information?

A

Customers analyze financial data to ensure the business can remain operational and continue providing products or services

46
Q

In what ways do employees and labor unions leverage financial information?

A

Employees assess the company’s financial stability for job security, while unions use financial data to negotiate better wages and benefits.

47
Q

What are the five key steps in the accounting process?

A
  1. Recording
  2. Classifying
  3. Summarizing
  4. Interpreting
  5. Communicating financial information.
48
Q

What is an economic entity in accounting?

A

A business or organization whose primary purpose is to generate profit for its owners.

49
Q

Define social entities

A

Social entities are nonprofit organizations that serve public interests

50
Q

What are some examples of social entities?

A

public schools, cities, and public hospitals.

51
Q

What are the main characteristics of a sole proprietorship?

A
  • 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
Q

Explain the concept of the “separate entity assumption.”

A

It is crucial to keep business transactions separate from personal transactions to accurately measure business performance.

53
Q

Describe the structure and responsibilities of a partnership

A

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
Q

What is a Limited Liability Partnership (LLP), and how does it differ from a regular partnership?

A

An LLP provides limited liability for all partners regarding another partner’s actions while maintaining the structure and responsibilities of a typical partnership

55
Q

What defines a corporation as a separate legal entity?

A

A corporation has its own legal identity, can own property, conduct business, and its owners (shareholders) are not personally liable for corporate debts

56
Q

Differentiate between publicly owned and privately owned corporations.

A

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
Q

How is ownership represented in a corporation?

A

Ownership is represented through stocks, with each share equating to a vote in corporate decisions

58
Q

What is a Subchapter S Corporation (S Corp), and what are its tax benefits?

A

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
Q

Explain the structure and benefits of a Limited Liability Company (LLC)

A

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
Q

What role does the SEC play in financial reporting?

A

The SEC oversees publicly owned corporations’ financial reporting and can override accounting decisions but delegates standard-setting to the accounting profession

61
Q

What are Generally Accepted Accounting Principles (GAAP)?

A

GAAP is a set of accounting standards developed to ensure consistency in financial reporting among publicly owned companies

62
Q

Describe the development process of GAAP prior to 2009

A

GAAP was developed by the Financial Accounting Standards Board (FASB) through discussions, public hearings, exposure drafts, and member voting, resulting in issued standards

63
Q

What significant change occurred in the authoritative sources of U.S. GAAP after July 1, 2009?

A

The FASB Accounting Standards Codification became the authoritative source, reorganizing accounting pronouncements into 90 topics and providing updates through Accounting Standards Updates.

64
Q

What is the purpose of auditing financial statements?

A

Auditing provides an independent verification that financial statements fairly present the company’s financial position and are in compliance with GAAP.

65
Q

How do internal reports for management differ from external reports?

A

Internal reports do not have to adhere to GAAP but should provide useful information for monitoring and controlling operations.

66
Q

List the four fundamental assumptions of GAAP

A
  1. Separate entity
  2. Going concern
  3. Monetary unit
  4. Periodicity of income
67
Q

Identify the four main principles of GAAP

A
  1. Historical cost basis
  2. Revenue recognition
  3. Matching
  4. Full disclosure
68
Q

What government organization has the final say & can override decisions on matters of financial reporting by publicly owned corps?

A

The Securities Exchange Commission (SEC)

69
Q

What is an entity?

A

Anything having its own separate identity, such as an individual, a town, a university, or a business

70
Q

What is an economic entity?

A

A business or organization whose major purpose is to produce a profit for its owners

71
Q

What is a social entity?

A

A nonprofit organization, such as a city, public school, or public hospital

72
Q

What is a Sole Proprietorship?

A

A business entity owned by one person, who is legally responsible for the debts and taxes of the business

73
Q

What is a partnership?

A

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
Q

What is corporation?

A

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
Q

What is a creditor?

A

One to whom money is owed

76
Q

What is a stock?

A

Certificates that represent ownership of a corporation

77
Q

What are stockholders?

A

The owners of a corporation; also called shareholder

78
Q

What are the Statements of Financial Accounting Standards?

A

Accounting principles established by the Financial Accounting Standards Board

79
Q
  1. Discussion Memorandum
A

An explanation of a topic under consideration by the Financial Accounting Standards Board

80
Q

Exposure Draft

A

A proposed solution to a problem being considered by the Financial Accounting Standards Board

81
Q

Accounting Standards Codification

A

The source of authoritative U.S. GAAP

82
Q

Accounting Standards Update

A

Changes to Accounting Standards Codification are communicated through Accounting Standards Update covering approximately 90 topics

83
Q

International Accounting

A

The study of accounting principles used by different countries

84
Q

Auditor’s report

A

An independent accountant’s review of a firm’s financial statements

85
Q
A

Fundamentals of Accounting (2 decks)

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