Chapter 2: Basic Financial Statements Flashcards
Assets have three basic characteristics
- Economic resources
- Owned by the business
- Expected to benefit future operations
The COST PRINCIPLE
Historical Cost refers to the original amount the entity paid to acquire the asset.
Example of Assets reported at historical cost:
Merchandise inventory, land, buildings, and equipment.
Example of Assets recorded at net realizable value:
Accounts receivable and investments.
The Going-Concern Assumption:
Indicates that we assume that a business will be a continuing enterprise. Supports the principle of historical cost.
The stable-dollar assumption
A limitation of measuring assets at historical cost is that the value of monetary unit or dollar is not always stable.
INFLATION VS DEFLATION
Inflation: where the value of monetary unit decreases, (You will purchase less than you would previously)
Deflation: The value of monetary unit increases (You will purchase more than you would previously)
Liabilities
Financial obligations or debts that represent negative future cash flows.
Owner’s equity
*Equal to total assets minus total liabilities
*Represents the owner’s claims on the assets of the business.
Increases vs decreases in owner’s Equity
INCREASES:
1. Investments of cash or other assets by owner’s and earnings from profitable opération of the business.
DECREASES:
2. Payments of cash or transferts of other assets to owners and losses from unprofitable opération of the business.
THE ACCOUNTING EQUATION
Assets= Liabilities + Owner’s equity
Income Statement
Summarization of the company’s revenue and expense transactions for a period of time
Revenues
Increases in the company’s assets from its profit-directed activities that will result in positive cash flows.
DEBITS
Expenses
Decreases in the company’s assets from its profit-directed activities that will result in negative cash flows.
CREDITS
