Chapter 1 Introducing Financial Statements Flashcards
Define accounting
system that records business transactions into financial statements
relays information to users about business activities to help them make decisions
What is accounting considered?
“Language of business”
Who are external users?
-do not directly run business
Financial accounting
-building the financial statements
ex.
- investors/shareholders
-lenders/creditors (banks)
-government
-customers
-auditors (external)
-vendors/suppliers.manufacturers
Who are internal users?
-do run the business
Managerial Accounting
-making business decisions
ex:
-employees- board of directors, executives>CFO/CEO, managements (controllers/analysts, all employees
- internal auditors
What is ethics?
the study of right from wrong
good vs bad decisions
What is fraud vs. error
Fraud has intent to deceive
Error is accidental
What is on the fraud triangle
- Opportunity-ability exists to commit fraud with low risk of being caught
- Pressures or incentives (personal or business)
- Rationalization- justifying the fraud
What are internal controls?
They help to mitigate (prevent) fraud
ex.
- locks/swipe access required
- passwords/firewalls
- segregation of duties
What is GAAP and what does it stand for?
Generally Accepted Accounting Principles
-US Financial Accounting is governed by GAAP
-Aims to make info relevant, reliable, and consistent/comparable
-SEC has the authority to set GAAP
What does SEC stand for and what did it form?
Securities and Exchange Commission
-formed the FASB- Financial Accounting Standards Board
-FASB sets GAAP and SEC oversees them
What is the IASB?
International Accounting Standards Board
-individuals from various countries
-issues IFRs (International Financial Reporting Standards)
-FASB and IASB work together to make financial info comparable
-trying to minimize the differences between GAAP and IFRS
What are the 4 accounting principles?
- Measurement/Cost Principle
- Revenue Recognition Principle
- Expense Recognition Principle/”Matching Principle”
- Full Disclosure Principle
What is the Measurement/Cost Principle?
-Accounting info is based on actual cost
-All transactions have to have a value
ex. exchanging a building for land
What is the Revenue Recognition Principle?
-Revenue- money earned from selling a good or service
-Recognize revenue when:
1. good or service is provided to customer AND
2. at an amount expected to be received
What is the Expense Recognition Principle/ “Matching Principle?”
-Expense- amount incurred (spent) while trying to earn the revenue
ex. salary, rent, utilities
-Records the expense as it is incurred to generate the revenue (usually in the same accounting period)
What is the Full Disclosure Principle?
-Required to report the details behind the financial statement numbers to help users make better decisions
- called the “footnotes” to the financial statement
What is the basic accounting equation?
Assets= Liabilities + Owners Equity
What are assets?
-Resources that a company owns
-Expect to yield future benefits
-Ex: cash, building, land, equipment, machinery, automobiles, supplies, computers, furniture
-Accounts receivable
What are accounts receivable?
-future inflow of cash
-provided a good/service and did not yet receive the cash
-asset
What are liabilities?
-Things that we owe
- Future obligations to pay
-Good or service was received but not yet paid
-Accounts payable
What are accounts payable?
-future outflow of cash
-future promise to pay for the good or service
-you paid an “amount”/paid with “credit”
-liability
What is owners equity?
-stockholders/shareholders equity
-the claims on the company by its owners
What is owners equity made up of?
contributed capital- the owners invested in the company
retained earnings- earning retained in the company (revenues, expenses, dividends)
What are dividends?
Money paid out to the owners
What are business transactions?
-Events or business activities that need recorded
-Each transaction impacts the accounting equations A=L+OE
-Every transaction must keep the accounting equation in balance
!!!always be specific with revenue and expense accounts
-If transactions does not say “paid on account” or “with credit” assume with cash
-In accounting a negative number is put in parenthesis
What are the 4 financial statements in order?
- Income statement
- Statement of returned earnings
- Balance sheet
- Statement of cash flow
What does every report/financial statement in accounting have and what does it look like?
a header
company name
type of report/financial statement
date/date range
————————————-
What is an income statement?`
-Computes the company net income/loss
-shows all the revenue and expense accounts
What is the income statement calculation?
revenues-expenses=net income/loss
What is a statement of returned earnings?
-Explains the change from beginning returned earnings to ending returned earnings
What is the statement of returned earnings calculation?
Beginning returned earnings
+/- net income/loss
- dividends
——————————-
Ending returned earnings
What is a balance sheet?
-Describes a company’s financial position
What is the balance sheet’s equation?
Accounting equation
A= L + E
What is the statement of cash flows?
-Shows all the inflows and outflows of cash during the year
What are the 3 categories of cash transactions in the statement of cash flows?
- Operating
- Investing
- Financing
What is operating?
day to day transactions to operate/run the business
ex: selling goods and services
paying daily/monthly expenses
What is investing?
internal company money
ex: buying and selling long term assets (held > 1 year)
What is financing?
outside money to help fund projects for our business
ex: issue common stock and paying dividends
receiving a loan and paying it back
What is the statement of cash flows calculation?
+/- change in operating activities
+/- change investing activities
+/- change in financing activities
—————————————————-
Income/Decrease in cash for the year
+ beginning of year cash
—————————————————-
end of year cash
—————————
—————————
What is the return of assets?
-measures the profitability of a company
-useful for company management to make business decisions
net income (rev-exp)
= ——————————–
average total assets (beginning total assets + ending total assets/ 2)
