Chapter 1 Key Terms Flashcards
Accounting
Information and measurement system that identifies, records, and communicates relevant information about a company’s business activities.
Accounting Equation
Equality involving a company’s assets, liabilities, and equity;
Assets = Liabilities + Equity;
Also called balance sheet equation.
Assets
Resources a business owns or controls that are expected to provide current and future benefits to the business.
Audit
Analysis and report of an organization’s accounting system, its records, and its reports using various tests.
Auditors (2 Types)
Individuals hired to review financial reports and information systems.
Internal auditors of a company are employed to assess and evaluate its system of internal controls, including the resulting reports.
External auditors are independent of a company and are hired to assess and evaluate the “fairness” of financial statements (or to perform other contracted financial services).
Balance Sheet
Financial statement that lists types and dollar amounts of assets, liabilities, and equity at a specific date.
Equation:
Assets= Liabilities + Owner’s Equity
Expanded Formula:
Assets= Liabilities + (Common Stock - Dividends + Revenue - Expenses)
Bookkeeping
Part of accounting that involves recording transactions and events, either manually or electronically; also called recordkeeping.
Business Entity Assumption
Principle that requires a business to be accounted for separately from its owner(s) and from any other entity:
- Sole Proprietorship
- Partnership
- Corporation
- Limited Liability Company (LLC)
Common Stock
Corporation’s basic ownership share; also generically called capital stock.
Conceptual Framework
The basic concepts that underlie the preparation and presentation of financial statements for external users; can serve as a guide in developing future standards and resolving accounting issues that are not addressed directly in current standards using the definitions, recognition criteria, and measurement concepts for assets, liabilities, revenues, and expenses.
Corporation
Business that is a separate legal entity under state or federal laws; its owners are referred to as shareholders or stockholders.
Cost Constraint
The notion that the benefit of a disclosure exceeds the cost of that disclosure.
Cost Principle
Accounting principle that prescribes financial statement information be based on actual costs incurred in business transactions.
Cost-benefit Constraint
The notion that the benefit of a disclosure exceeds the cost of that disclosure.
Data Analytics
A process of analyzing data to identify meaningful relations and trends; in accounting, data analytics helps individuals make informed business decisions.
Data Visualization
A graphical presentation of data to help people understand its significance and draw reliable inferences.
Equity
Owner’s claim on the assets of a business; equals the residual interest in an entity’s assets after deducting liabilities; also called net assets or owner’s equity.
Ethics
Codes of conduct by which actions are judged as right or wrong, fair or unfair, honest or dishonest.
Events
Happenings that both affect an organization’s financial position and can be reliably measured.
Expanded Accounting Equation
Expanded version of: Assets = Liabilities + Equity.
For a noncorporation:
[Equity = Owner’s capital − Owner’s withdrawals + Revenues − Expenses.]
For a corporation:
[Equity = Contributed capital + Retained earnings + Revenues − Expenses − Dividends.]
Expense Recognition Principle
Prescribes expenses to be reported in the same period as the revenues that were earned as a result of the expenses.
Expenses
Outflows or using up of assets as part of operations of a business to generate sales.
External Transactions
Exchanges of economic value between one entity and another entity.
External Users
Persons using accounting information who are not directly involved in running the organization.
Financial Accounting
Area of accounting aimed mainly at serving external users.
Financial Accounting Standards Board (FASB)
Independent group of full-time members responsible for setting accounting rules.
Full Disclosure Principle
Principle that prescribes financial statements (including notes) to report all relevant information about an entity’s operations and financial condition.
Generally Accepted Accounting Principles (GAAP)
Rules that specify acceptable accounting practices.
Goin-concern Assumption
Principle that prescribes financial statements to reflect the assumption that the business will continue operating.
Income Statement
Financial statement that subtracts expenses from revenues to yield a net income or loss over a specified period of time; also includes any gains or losses.
Equation:
Revenue - Expenses = Net Income
Internal Controls
All policies and procedures used to protect assets, ensure reliable accounting, promote efficient operations, and urge adherence to company policies.
Internal Transactions
Activities within an organization that can affect the accounting equation.
Internal Users
Persons using accounting information who are directly involved in managing the organization.
International Accounting Standards Board (IASB)
Group that identifies preferred accounting practices and encourages global acceptance; issues International Financial Reporting Standards (IFRS).
International Financial Reporting Standards (IFRS)
Set of international accounting standards explaining how types of transactions and events are reported in financial statements; IFRS are issued by the International Accounting Standards Board.
Liabilities
Creditors’ claims on an organization’s assets; involves a probable future payment of assets, products, or services that a company is obligated to make due to past transactions or events. (
Limited Liability Company (LLC)
Organization form that combines select features of a corporation and a limited partnership.
- Provides limited liability to its members (owners).
- Free of business tax
- Allows members to actively participate in management
Managerial Accounting
Area of accounting aimed mainly at serving the decision-making needs of internal users; also called management accounting.
Matching Principle
Prescribes expenses to be reported in the same period as the revenues that were earned as a result of the expenses.
Measurement Principle
Principle that prescribes financial statement information, and its underlying transactions and events, be based on relevant measures of valuation; also called the cost principle.
Members
Owners of a limited liability company (LLC); rights and responsibilities are specified in the operating agreement and by state LLC regulations.
Monetary Unit Assumption
Principle that assumes transactions and events can be expressed in money units.
Net Income
Amount earned after subtracting all expenses necessary for and matched with sales for a period; also called income, profit, or earnings.
Net Loss
Excess of expenses over revenues for a period.
Owner Investments
Assets put into the business by the owner.
Partnership
Unincorporated association of two or more persons to pursue a business for profit as co-owners.
- No additional business income tax.
- Unlimited liability. Partners are jointly liable for partnership debts.
- Not a separate legal entity.
- Business ends with a partner death or choice.
Proprietorship
Business owned by one person that is not organized as a corporation; also called sole proprietorship.
Record-keeping
Part of accounting that involves recording transactions and events, either manually or electronically; also called bookkeeping.
Retained Earnings
Cumulative income less cumulative losses and dividends.
Return on Assets (ROA)
Ratio reflecting operating efficiency; defined as net income divided by average total assets for the period; also called return on total assets or return on investment.
Equation:
Return on Assets= Net Income/Average Total Assets
Revenue Recognition Principle
The principle prescribing that revenue is recognized when goods or services are delivered to customers.
Revenues
Gross increase in equity from a company’s business activities that earn income; also called sales.
Securities and Exchange Commission (SEC)
Federal agency Congress has charged to set reporting rules for organizations that sell ownership shares to the public.
Shareholders
Owners of a corporation; also called stockholders.
Shares
Equity of a corporation divided into ownership units; also called stock.
Sole Proprietorship
Business owned by one person that is not organized as a corporation; also called proprietorship.
- No additional business income tax.
- Unlimited liability. Owner is personally liable for proprietorship debts.
- Not a separate legal entity.
- Business ends with owner death or choice.
Statement of Cash Flows
A financial statement that lists cash inflows (receipts) and cash outflows (payments) during a period; arranged by operating, investing, and financing.
Equation:
(+/-)Operating C.F (+/-)Investing C.F. (+/-)Financing C.F.= Change in Cash
Statement of Retained Earnings
Report of changes in retained earnings over a period; adjusted for increases (net income), for decreases (dividends and net loss), and for any prior period adjustment.
Equation:
Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings
Stock
Equity of a corporation divided into ownership units; also called shares.
Stockholders
Owners of a corporation; also called shareholders.
Time Period Assumption
Assumption that an organization’s activities can be divided into specific time periods such as months, quarters, or years.
