Financial Accounting Week 1 Flashcards
What is the purpose of financial accounting?
To provide meaning, quantitative financial information
Who are the two most relevant decision-makers with financial accounting information?
Shareholders and debt holders
What “decision-makers” that are using financial accounting information are typically seen as the owners?
Shareholders
What “decision-makers” using financial accounting information are typically seen as the creditors?
Debt holders
What two attributes make financial information useful?
The relevance and faithful representation
What does GAAP stand for?
Generally accepted accounting principles
What does the SEC stand for?
Securities and exchange commission
What does the AICPA stand for?
The American Institute of certified public accountants
What are the five required financial statements for financial accounting information?
- Balance sheet
- Income Statement
- Statement of Shareholder’s Equity
- Statement of Cash Flows
- Statement of Comprehensive Income
What is a balance sheet in reference to financial accounting?
A sheet that describes the sources and uses of funds at a firm point in time.
What is an income statement in reference to financial accounting?
The document that shows how much money a company has earned (not cash) over a
period of time.
How is a balance sheet helpful within financial accounting?
- evaluates capital structure
- assesses risk and future cash flow
How is an income statement helpful with financial accounting?
- helps evaluate past performance
- useful and predicting a firms future performance
- assess risk of uncertainty or risk in achieving future cash flows
What is an asset?
An economic resource that is owned or controlled
Within financial accounting: what does cash, accounts receivable, inventory, land, buildings, equipment, copyrights, or investments refer to?
Assets
What stipulations must an asset have to be reported on a balance sheet?
They must be owned or controlled by the company and they must possess expected future economic benefits
What two ways are assets reported to have value?
Historical cost or market value
Can you report assets within financial accounting that are not reliably measured?
No, you may only include assets that can be reliably measured
What are liabilities within financial accounting?
They are future obligations to pay cash, transfer assets, or provide services to another party
What is owners equity within financial accounting?
Ownership interest in the net assets of an entity
What accounts comprise a balance sheet?
Assets, liabilities, owners equity
What formula do balance sheets use?
Assets = liabilities + owners equity
How are assets ordered in a balance sheet?
assets are listed in order of the liquidity, ascending in order of how quickly they can be converted to cash
How quickly would you have to convert an asset to cash for it to be considered a current asset?
Within a year
How quickly would a liability have to mature for it to be considered a current liability?
Less than one year
In what order are liabilities listed on balance sheets?
Liabilities are listed in order of maturity, assending in time for maturity
What is the equation for retained earnings?
Beginning retained earnings + net income - dividends = ending retained earnings
What are revenues within an income statement?
An increase in a companies resource from the sale of goods or services
What are expenses with an income statement?
Costs incurred in the normal course of business to generate revenue
What are gains/losses within an income statement?
Money made or lost outside of normal firm operations
What is net income or loss?
An overall measure of the performance of a company
What is a statement of shareholders equity in reference to financial accounting?
The statement of equity is a reconciliation of the beginning and ending balances of shareholders equity accounts
What is a statement of cash flow in reference to financial accounting?
A statement that describes an entities cash inflows, and cash out flows during a period
What three sections are included within a statement of cash flows?
- operating activities
- investing activities
- financing activities
What are operating activities within the statement of cash flows?
Cash transactions that enter into the determination of net income
What are investing activities within the statement of cash flows?
Cash transactions involved in the purchase and sale of PPE, other long-term assets, and making/collecting loans
What are financing activities within the statement of cash flows?
Cash transactions, whereby resources are obtained or repaid to owners and creditors
What are the four steps of the accounting cycle?
- Analyze transactions
- Record effects of transactions
- Summarize effects of transactions by account
- Prepare reports
What is a transaction in reference to financial accounting?
An event that causes a change in balance sheet values
What is an account in reference to financial accounting?
An accounting record in which the results of transactions are accumulated
What is double entry accounting in reference to financial accounting?
A method of accounting that includes debts and credits
What is accrual accounting?
A system of accounting in which revenues and expenses are recorded as they are earned and incurred, not necessarily when cash changes hands
What is revenue recognition?
Companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive an exchange for those goods or services
What is the matching principle within financial accounting?
All costs and expenses incurred in generating revenues must be recognized in the same period as the revenue.
What are T-Accounts?
A place to accumulate the effect of journal entries on each account.
