Chapter 1 Terms Flashcards
The process of identifying, measuring, recording, and communicating an organization’s economic activities to users.
accounting
*a set of less onerous GAAP‐based standards developed by the Canadian Accounting Stan‐
dards Board (AcSB)
Accounting Standards for Private Enterprises (ASPE)
Shows that the total assets of a business must always equal the total claims against those assets by creditors and owners. Expressed as assets = liabilities + equity.
accounting equation
Obligations to pay a creditor for goods purchased or services rendered.
accounts payable
Represents amounts to be collected in cash in the future for goods sold or services provided to customers on credit.
accounts receivable
- economic resources that provide future benefits to the business
assets
Shows a business’s assets, liabilities, and equity at a point in time.
balance sheet, or statement of financial position
*shareholders do not manage a corporation but participate indirectly through the election of this group
board of directors
An organization that sells products and/or services for profit.
business organization
The body that governs accounting standards in Canada.
Canadian Accounting Standards Board (AcSB)
Coins and currency, usually held in a bank account.
cash
*These have the following rights:
* The right to participate in the management of the corporation by voting at shareholders’
meetings (this participation includes voting to elect a board of directors; each share nor‐
mally corresponds to one vote).
* The right to receive dividends when they are declared by the corporation’s board of direc‐
tors.
* The right to receive assets upon liquidation of the corporation.
* The right to appoint auditors through the board of directors.
common shares
A characteristic that tells users of the information that businesses utilize similar accounting practices.
comparability
- a business owned by one or more owners.
corporation
An individual or business that owns the right to receive payment from another individual or business.
creditor
Assets financed through liabilities.
debt
Distribution of net income to shareholders.
dividends
Represents the net assets owned by the shareholders.
equity
Beliefs that help us differentiate right from wrong in the application of underlying accounting concepts or principles.
ethics
The assets that have been used up or the obligations incurred in the course of earning revenues.
expenses
Complete, neutral, and free from error.
faithful representation
The area of accounting that focuses on external reporting and meeting the needs of external users.
financial accounting
The medium through which information is communicated to external users.
financial statements
- An economic exchange.
financial transaction
Raising of money needed to invest in assets.
financing activities
A 12-month period
fiscal year
The underlying accounting concepts or principles that is based on International Financial Reporting Standards (IFRS) for publically accountable enterprises.
Generally Accepted Accounting Principles (GAAP)
The financial statement that communicates information about a business’s financial performance by summarizing revenues less expenses over a period of time.
income statement
Financial statements that are prepared usually every three months, primarily for the use of shareholders or creditors.
interim financial statements
People who work for the organization and are responsible for planning, organizing, and operating the entity.
internal users
The organization that issues the IFRS.
International Accounting Standards Board (IASB)
- The buying of assets needed to generate revenues.
investing activities
When a corporation sells its shares to shareholders.
issuing shares
- an obligation to pay an asset in the future.
liability
The most shareholders can lose is what they invested in the corporation.
limited liability
The area of accounting that serves the decision-making needs of internal users.
managerial accounting
A period when business operations are at a low point.
natural year
The difference when revenues are greater than expenses.
net income or profit
The difference when expenses are greater than revenues.
net loss
An organization that exists to meet various societal needs and does not have profit as a goal.
non-business organization
The day-to-day processes involved in selling products and/or services to generate net income.
operating activities
A group of individuals who come together to pursue a common set of goals and objectives.
organization
A business owned by two or more individuals.
partnership
Assets that are paid for by using cash in advance and have benefits that apply over future periods.
prepaid expenses
- A corporation that holds
its shares privately and does not sell them publicly
private enterprise (PE)
A business owned by one person.
proprietorship
A corporation that sells its shares publicly, typically on a stock exchange.
publicly accountable enterprise (PAE)
The ability to make a difference in the decision-making process.
relevance
The sum of all net incomes earned by a corporation over its life, less any distributions of these net incomes to shareholders.
retained earnings
Created when a business provides products or services to a customer in exchange for assets.
revenues
Represents how much shareholders have invested.
share capital
An owner who owns shares of a corporation.
shareholder
Units of ownership in a corporation.
shares
Items such as sales invoices and bills from creditors that contain information about economic events.
source documents
*explains how the balance in cash changed over a period of time by detailing the sources (inflows)
and uses (outflows) of cash by type of activity: operating, investing, and financing
statement of cash flows (SCF)
Provides information about how the balances in Share capital and Retained earnings changed during the period.
statement of changes in equity
Information that is available to decision makers in time to be useful.
timeliness
- clear and concise
understandability
- represents an advance payment of cash from
a customer for a business’ services or products to be provided in the future
unearned revenue
A characteristic of a business meaning that if the business could not pay its debts, the owner(s) would be responsible even if the business’s debts were greater than the owner’s or owners’ personal resources.
unlimited liability
*others are able to confirm that the information faithfully represents
the economic activities of the business
verifiability
*end of each 12‐
month period
year-end
Identify and explain the six qualitative characteristics of GAAP.
Use RUFCTV to remember the six qualitative characteristics of Generally Accepted Accounting Principles:
Relevant to decision makers
Understandable so clear and concise
Faithful Representation so it is neutral, complete, and free of error
Comparable to other businesses by following ASPE (Accounting Standards for Private Enterprises) or IFRS (International Financial Reporting Standards)
Timely so that decision makers have it when making decisions
Verifiable meaning that reporting could be repeated by someone else with the same result
Identify and explain at least five of the nine principles that support the GAAP qualitative characteristics.
Use MMMRBCCFG to remember these:
Matching: reporting transactions when they occur
Materiality: don’t bother with proper accounting if it won’t affect decision makers ($5 stapler is an expense, not a depreciable item)
Monetary unit: stable money, not bitcoin
Recognition: recognize that you have revenue or expense when it occurs, and not when cash is received
Business entity: separate records for each economic entity
Consistency: same accounting policies and procedures over time
Cost: based on cost at time of purchase, not the advertised price, not market value that changes over time,
Full disclosure: show everything
Going concern: must tell if business might close; there is an assumption that it will not, so that is why you must report this
What are the four financial statements?
Income Statement
Statement of Changes in Equity
Balance Sheet
Statement of Cash flows
Which financial statement measures financial performance?
income statement
Which financial statement measures financial position?
balance sheet
Explain how retained earnings and dividends are related.
Retained earnings = all revenue – all expenses – all dividends
Retained earnings is what the company has retained over the course of its entire operation. Dividends are what is given out to shareholders, and thus they are not retained by the business.
What are the three primary components of the balance sheet?
Assets, liabilities, and equity
Equity consists of what two components?
Share capital and retained earnings
How are assets financed?
Financing activities are the raising of money needed to invest in assets. Financing can involve issuing share capital (getting money from the owners known as shareholders) or borrowing.
Identify and explain the three types of activities a business engages in.
operating activities = the day‐to‐day processes involved in selling products and/or services to generate net income
investing activities = buying of assets needed to generate revenues.
financing activities = raising of money needed to invest in assets
What are notes to the financial statements?
These notes are generally located at the end of a set of financial statements. The notes provide greater detail about various amounts shown in the financial statements, or provide non‐quantitative information that is useful to users. For example, a note may indicate the estimated useful lives of long‐lived assets, or loan repayment terms.
What is the accounting equation?
Assets = Liabilities + Equity
Debits = Credits
What is the accounting equation?
assets = liabilities + equity or
assets - liabilities = equity
What are the distinctions among calendar, interim, and fiscal year ends?
Financial statements are prepared at regular intervals — usually monthly or quarterly — and at the end of each 12‐month period.
This 12‐month period is called the fiscal year. Accounting reports, called the annual financial statements, are prepared at the end of each 12‐ month period, which is known as the year‐end of the entity.
Interim is anything that is not at year-end.
Some companies’ year‐ends do not follow the calendar year (year ending December 31). This may be done so that the fiscal year coincides with their natural year. A natural year ends when business operations are at a low point. For example, a ski resort may have a fiscal year ending in late spring or early summer when business operations have ceased for the season.
so fiscal year-end = Dec 31 or whenever that entity calls their year-end
natural year-end = when operations are at a low point
interim = somewhere in between year-ends
What is the accounting equation?
assets = liabilities + equity or
assets - liabilities = equity
