Chp 1 Flashcards
2 types of accounting data users, and who they include
internal: finance, marketing, HR, managers. Managerial accounting is internal reports for these users.
external: creditors, investors
IRS, regulatory agencies (such as SEC), customers, unions
Financial accounting is for these users.
3 activities that make up accounting
identify, record, and communicate the economic events of an org to interested users
Definition of ethics
Standards of conduct by which one’s actions are judged as right or wrong, honest or dishonest, fair or not fair.
What do GAAP control?
How to report economic events.
Primary US and non-US accounting standard-setting bodies.
FASB - Financial Accounting Standards Board
IASB - International Accounting Standards Board
What are the 2 GAAP measuring principles?
Cost principle = you must record assets at their cost.
Fair value principle= must report assets and liabilities at fair value.
2 main GAAP assumptions and their definitions
Monetary unit assumption = you only must record transactional data that can be expressed in money terms.
Economic entity assumption = entity’s activities must be kept separate from those of the owner and all other economic entities.
What are assets?
Resources a company owns.
Common characteristic of all assets.
Capacity to provide future services or benefits (eventually result in cash flows [receipts]
What are liabilities and stockholders’ equity?
L = Claims of creditors (paybles)
SE = Claims of owners (ownership claim on total assets) also = residual equity
What are revenues?
The gross increase in stockholders’ equity resulting from business activities entered into for the purpose of earning income.
Usually results in an increase in an asset (otherwise, decreases a liabilitiy)
What are expenses?
The cost of assets consumed or services used in the process of earning revenue.
Also: Decreases in stockholder’s equity that result from operating the business.
The 3 items that determine retained earnings section of balance sheet
revenues
expenses (net income or loss)
dividends (possible when there is net income)
What increases and decreases stockholders’ equity?
Increases: investments by stockholders and revenues
Decreases: expenses and dividends
Definition of dividend
Distributions of cash or other assets to stockholders.
Criterion for determining whether an event is a transaction.
Is the financial position of the company changed?
Financial position change = chain in assets, liabilities, or SE
The 4 financial statements and the result of each that’s needed to prepare the next statement.
Income statement (net income or loss)
Retained earnings statement (retained earnings)
Balance sheet (cash)
Statement of cash flows
What the income statement shows
Profitability - net income or net loss
What retained earnings statement shows
Why the retained earnings increased or decreased
5 elements of the statement of cash flows
- cash effects of operating activities (revenues and expenses)
- cash effects of investing transactions
- cash effects of financing transactions
- net increase or decrease in cash during that period
- cash amount (total) at end of period
