Chapter 1 Notes Flashcards
Financial Accounting
Accounting information provided to external users.
Functions of Financial Accounting
To measure business activities of a company and to communicate those measurements to external parties for decision-making purposes.
Business Activities
The activities measured by financial accounting, including financing, investing, and operating activities.
Financing Activities
Transactions the company has with investors and creditors.
Investing Activities
Transactions involving the purchase and sale of resources that are expected to benefit the company for several years.
Operating Activities
Transactions that relate to the primary operations of the company.
Corporation
A company that is legally separate from its owners, providing stockholders with limited liability.
Sole Proprietorship
A business owned by one person.
Partnership
A business owned by two or more persons, which does not provide limited liability.
Assets
Total resources of the company.
Liabilities
Amounts owed to creditors.
Stockholders’ Equity
Owners’ claims to resources.
Accounting Equation
Assets = Liabilities + Stockholders’ Equity.
Revenues
Amounts recognized when the company sells products or provides services to customers.
Expenses
Costs of providing products and services and other business activities during the current period.
Net Income
The difference between revenues and expenses, also known as earnings or profit.
Dividends
Cash payments to stockholders that are not considered expenses.
Dividends
Cash payments to stockholders.
Assets
The resources of the company that will benefit future operations, including cash, supplies, inventory for sale to customers, buildings, land, and investments.
Revenues
Amounts recorded when the company sells products or provides services to customers.
Financial Statements
Periodic reports published by the company for the purpose of providing information to external users.
Income Statement
Reports the company’s revenues and expenses over an interval of time, comparing revenues and expenses to assess the company’s ability to earn a profit.
Net Income
If revenues exceed expenses, the result is net income.
Net Loss
If revenues are less than expenses, the result is net loss.
Statement of Stockholders’ Equity
Summarizes the changes in stockholders’ equity over an interval of time.
Stockholders’ Equity
Common Stock + Retained Earnings.
Total Expenses
The sum of all expenses incurred by the company.
Service Revenue
The revenue generated from providing services.
Rent Expense
The cost incurred for renting property or equipment.
Supplies Expense
The cost incurred for supplies used in operations.
Salaries Expense
The cost incurred for employee salaries.
Utilities Expense
The cost incurred for utilities such as electricity and water.
Interest Expense
The cost incurred for interest on borrowed funds.
Other Expenses
Any additional expenses not categorized under specific expense types.
Balance Sheet
A financial statement that summarizes a company’s assets, liabilities, and stockholders’ equity at a specific point in time.
Statement of Cash Flows
A financial statement that provides aggregate data regarding all cash inflows and outflows a company receives.
Liabilities
Obligations of the company that it is required to pay in the future.
Expenses
The costs incurred by a company in the process of earning revenue.
Key Point
The measurement role of accounting is to create a record of the activities of a company.
Statement of Stockholders’ Equity
Reports information related to changes in common stock and retained earnings each period.
Dividends
Represent the payment of cash but are not considered an expense in running the business.
Net income for the period
The amount added to retained earnings after subtracting dividends.
Balance Sheet
Presents the financial position of the company on a particular date.
Financial position formula
Resources = Claims to Resources.
Change in retained earnings
Equals net income less dividends for the period.
Total assets
350000
Total liabilities
140000
Total stockholders’ equity
210000
Accounts Payable
A liability that does not appear in the income statement.
Cash
An asset that does not appear in the income statement.
Rent Expense
An expense that appears in the income statement.
Assets = Liabilities + Stockholders’ Equity
The relationship reflected in the balance sheet.
Common Stock
Equity that represents ownership in the company.
Retained Earnings
The cumulative amount of net income retained in the company after dividends.
Issuance of common stock
The process of selling shares to raise capital.
Beginning balance
The amount at the start of the period, which is zero for the first month of operations.
Ending balance
The total amount after accounting for net income and dividends.
Total liabilities and stockholders’ equity
Must equal total assets on the balance sheet.
Utilities payable
A liability representing unpaid utility bills.
Interest payable
A liability representing interest that has accrued but not yet paid.
Other liabilities
Liabilities that do not fall into specific categories listed.
Concept Check 1-3
Asks which accounts would appear in a company’s income statement.
Concept Check 1-4
Asks which relationship is reflected in the balance sheet.
Assets
Resources owned by a company.
Liabilities
Claims against the company’s resources.
Stockholders’ Equity
The residual interest in the assets of the entity after deducting liabilities.
Statement of Cash Flows
Measures activities involving cash receipts and cash payments over an interval of time.
Operating Cash Flows
Cash transactions involving revenue and expense activities.
Investing Cash Flows
Cash transactions for the purchase and sale of long-term assets and investments.
Financing Cash Flows
Cash transactions with lenders and stockholders.
Net Cash Flows from Operating Activities
The difference between cash inflows from customers and cash outflows for salaries and rent.
Net Cash Flows from Investing Activities
Total cash spent on purchasing equipment.
Net Cash Flows from Financing Activities
Total cash received from issuing stock and borrowing minus cash paid for dividends.
Net Increase in Cash
The total change in cash during the period.
Cash at the Beginning of the Period
The amount of cash available at the start of the period.
Cash at the End of the Period
The amount of cash available at the end of the period.
Operating Activity
Cash collected from customers representing revenue-related activity.
Income Statement
A financial statement showing revenues, expenses, and net income.
Revenues
The income generated from normal business operations.
Expenses
The costs incurred in the process of earning revenues.
Net Income
The profit of a company after all expenses have been deducted from revenues.
Balance Sheet
A financial statement that summarizes a company’s assets, liabilities, and stockholders’ equity.
Total Liabilities and Stockholders’ Equity
The sum of all liabilities and equity, representing the total claims against the company’s assets.
Ending Balance
The final amount in an account at the end of a period.
Dividends
Payments made to shareholders from a company’s earnings.
Issuances
The process of offering new shares to investors.
Retained Earnings
All transactions that affect revenues or expenses reported in the income statement ultimately affect the balance sheet through the balance in retained earnings.
Annual Report
The financial statements are a key component of a company’s annual report.
Management’s Discussion and Analysis (MD&A)
The MD&A section typically includes management’s views on significant events, trends, and uncertainties pertaining to the company’s operations and resources.
Note Disclosures
Note disclosures offer additional information either to explain the information presented in the financial statements or to provide information not included in the financial statements.
Financial Accounting
Financial accounting plays a role in the decision-making process.
Economic Activity Measurement
Accounting serves an important role in a prosperous society by measuring economic activity and communicating useful information to help investors and creditors make good decisions.
Judgment and Critical Thinking in Accounting
The practice of accounting requires judgment and critical thinking skills.
Investment and Lending Decisions
Financial accounting serves an important role by providing information useful in investment and lending decisions.
Stock Price Performance
No single piece of company information better explains companies’ stock price performance than does financial accounting net income.
Debt Level Indicator
A company’s debt level is an important indicator of management’s ability to respond to business situations and the possibility of bankruptcy.
Generally Accepted Accounting Principles (GAAP)
GAAP refers to formal standards that should be followed in financial accounting.
Investment Growth Analysis
Amounts in this chart represent the investment growth based on the median stock return of each group each year.
U.S. Companies in Analysis
Companies included in this analysis are all U.S. companies with listed stocks, which averages about 6,000 companies per year.
Generally Accepted Accounting Principles (GAAP)
The rules of financial accounting.
Financial Accounting Standards Board (FASB)
An independent, private body that has primary responsibility for the establishment of GAAP in the United States.
International Accounting Standards Board (IASB)
An organization responsible for developing and promoting international financial reporting standards.
Securities and Exchange Commission (SEC)
The U.S. government agency that oversees securities transactions, activities of financial professionals, and mutual fund trading to prevent fraud and intentional deception.
Auditors
Trained individuals hired by a company as an independent party to express a professional opinion of the extent to which financial statements are prepared in compliance with GAAP and are free of material misstatement.
Role of Auditors
Help ensure that management has appropriately applied GAAP in preparing the company’s financial statements.
Objectives of Financial Accounting
Financial accounting should provide information that is useful to investors and creditors in making decisions, helps to predict cash flows, and tells about economic resources, claims to resources, and changes in resources and claims.
Primary Objective of Financial Accounting
To provide useful information to investors and creditors in making decisions.
Independent Auditor’s Report
A report that presents the auditor’s opinion on the fairness of the financial statements of a company.
Consolidated Balance Sheets
Financial statements that present the financial position of a company and its subsidiaries at a specific point in time.
Consolidated Statements of Income
Financial statements that show the company’s revenues and expenses over a period of time.
Consolidated Statements of Cash Flows
Financial statements that provide information about the cash inflows and outflows of a company during a specific period.
Material Misstatement
An error or omission in financial statements that could influence the economic decisions of users.
Credibility in Financial Statements
The trustworthiness of financial statements, which is enhanced by the involvement of auditors.
Economic Resources
Assets owned by a company that are expected to provide future economic benefits.
Claims to Resources
Obligations or rights that a company has regarding its resources.
Changes in Resources and Claims
Variations in the economic resources and obligations of a company over time.
Financial Position
The status of a company’s assets, liabilities, and equity at a specific point in time.
Investors and Creditors
Stakeholders who rely on financial statements to make informed decisions regarding their investments and lending.
Professional Opinion
An assessment made by auditors regarding the accuracy and compliance of financial statements with GAAP.
Independent Party
An entity or individual that is not influenced by the company being audited and provides an unbiased opinion.
Financial Statements
Documents that provide an overview of a company’s financial condition, including balance sheets, income statements, and cash flow statements.
Auditors
Independent parties hired by a company to express a professional opinion on the compliance of financial statements with GAAP.
Public Accounting
A sector of accounting where services are provided to the public, including auditing and tax services.
Private Accounting
Accounting services provided within an organization, as opposed to public accounting.
Big 4
The four largest international accounting and professional services firms.
Financial Accountants
Accountants who prepare financial statements and reports for external users.
Managerial Accountants
Accountants who provide information for internal decision-making within an organization.
Internal Auditors
Professionals who evaluate and improve the effectiveness of risk management, control, and governance processes within an organization.
Tax Preparers
Professionals who prepare tax returns for individuals or businesses.
Payroll Managers
Individuals responsible for overseeing the payroll department and ensuring employees are paid accurately and on time.
Information Managers
Professionals who manage and oversee an organization’s information systems and data.
Management Advisors
Consultants who provide advice to organizations on management practices and strategies.
Tax Planners
Professionals who help individuals and businesses minimize their tax liabilities through strategic planning.
Forensic Accountants
Accountants who investigate financial discrepancies and fraud.
Conceptual Framework
A structure established by the FASB that provides standard setters with a benchmark for creating consistent financial reporting rules.
Qualitative Characteristics of Useful Financial Information
Characteristics that enhance the usefulness of financial information, including relevance and faithful representation.
Relevance
The capacity of financial information to influence decision-making by helping users form predictions about the outcomes of past, present, and future events.
Faithful Representation
The quality of financial information that accurately reflects the economic phenomena it purports to represent.
Comparability
The ability to compare financial information across different entities or time periods.
Verifiability
The quality of information that allows different knowledgeable and independent observers to reach a consensus that a particular depiction is a faithful representation.
Timeliness
The characteristic of information that ensures it is available to decision-makers in time to be capable of influencing their decisions.
Understandability
The quality of information that enables users to comprehend its meaning.
Periodicity Assumption
The assumption that the economic life of an enterprise can be divided into artificial time periods for periodic financial reporting.
Going Concern Assumption
The assumption that an entity will continue to operate indefinitely unless there is evidence to the contrary.
