Exam 1 Flashcards
What is the purpose of accounting?
to communicate financial info to people outside the business
What is financial reporting?
Giving and communicating reports to external company users
What is the language of business?
accounting
Who uses financial statement information?
Investors, creditors, the SEC, auditors, stock analysts, the IRS, shareholder activists
What is cash basis accounting?
Tracking transactions with the interest of tracking cash inflows and outflows.
What is accrual basis accounting?
Tracking transactions with interest of matching in time the recognition of sales/gains and expenses/losses.
Do we use accrual or cash basis accounting and why?
You use accrual because it gives a better representation of company performance, less income ups and downs each year.
Who creates accounting rules and what are they called?
The SEC delegates authority to FASB, who creates the GAAP principles for accounting.
Are the accounting rules used in the US the same as rules used internationally?
No, there is the IFRS that over 100 countries use, US is not one of them.
What does IFRS stand for?
International Financial Reporting Standards
What is the difference between IFRS and GAAP?
GAAP is rule based, IFRS is principle based
Why do we need accounting rules?
- Companies could do whatever they want with reporting
- they may not report the negatives in their reports
- that all companies reporting can be uniform
- preventing fraud
What is an auditor?
Someone who reviews financial statements and ensure they follow proper standards.
What is an external auditor?
Someone who has no ties to the company, no shares of stock or related to anyone in the company. They work somewhere else.
What is an internal auditor?
Someone part of company, hired by company, paid by company
What is an economic event?
any event that causes a change in the financial position of the company
What is an external economic event?
an economic event that occurs between a company and another entity
What is an internal economic event?
no exchange but something occurs inside the company that changes their financial position
What is the general ledger?
A collection of T-accounts used to keep track of increases, decreases, and balances of financial statement accounts
What is the accounting process cycle?
A process by which a transaction is recorded, processed, analyzed, and ultimately reflected in a company’s financial statements.
How many steps are in the accounting process cycle?
10
What is an adjusting entry?
a journal entry used to record internal economic events at the end of any period when financial statements are prepared
What 3 situations require adjusting entries?
Prepayments, accruals, estimates
Name the 4 basic financial statements.
- Balance Sheet
- Income Statement
- Statement of Cash Flows
- Statement of Shareholders’ Equity
