Fundamental Accounting Principles CH1 Flashcards
External Users
Do not directly run the organization and have limited access to info.
Lenders, Shareholders, Board of Directors, External auditors, nonmanagerial and non executive employees and labor unions, Regulators, voters and government officials, contributors, suppliers, customers
Internal Users
Directly manager the organization
Purchasing managers, Human resource managers, production managers, distribution managers, marketing managers, service managers, research & development managers
Fraud triangle
consists of Opportunity. Pressure, and rationalization
Opportunity: Low risk of being caught and able to commit fraud
Pressure: Incentive to create fraud
Rationalization: justifies fraud or does not see its criminal nature
Internal Controls
procedures to protect assets ensure reliable accounting , promote efficiency, and uphold company policies
Sarbanes-Oxley Act
Dodd-Frank Wall Street Reform
Consumer Protection Act
Clawback - mandates recovery of excessive pay
Whistleblowers - SEC pays whistleblowers 10% to 30% of sanctions exceeding $1 Million
Accounting Principles
Measurement principle
revenue principle
expense recognition principle
full disclosure principle
Measurement Principle
accounting info is measured as actual cost
GAAP
generally accepted accounting principles
Revenue Recognition Principle
Revenue is recognized when
1 - goods or services are provided to a customer
2- at the amount expected to be received.
Expense recognition principle
matching principle
records expenses incurred to generate the revenue reported
Full disclosure principle
reports details behind financial statements that would impact user’s decisions
Accounting assumptions
going concern assumptions
monetary unit assumptions
time period assumptions
business entity assumptions
Going-concern assumptions
presumes business will continue to operate instead of being closed or sold
Monetary unit assumption
Transactions and events are expressed in monetary, or money units
Time period assumptions
the life of a company can be divided into time periods such as months and years, and useful reports can be prepared for these periods
Business entity assumptions
a business is accounted for separately from other business entities and its owner
Sole proprietorship
1 owner no additional business income tax unlimited liability not a separate legal entity business ends with owner's death or by choice
Partnership
2 or more owners/partners no additional business income tax unlimited liability not a separate legal entity Business ends with a partner's death or by choice
Limited liability company (LLC)
1 or more owners/called members no additional business income tax limited liability owners/members - not personally liable for LLC debts a separate legal entity with same rights and responsibilities as a person indefinite
Cost constraint
cost-benefit/accounting constraint
says that information disclosed by an entity must have benefits to the user that are greater than the costs of providing it.
Double taxiation
- corporations income is taxed
2. dividends to owners are taxed as part of the owners personal income
Liabilities
creditor’s claim on assets
obligations to provide assets, products, or services to others
money owed.
Equity
owner’s claim on assets
= assets - liabilities
Assets
resources a company owns or controls
assets = liabilities + equity
Owner, capital
Owner’s investments are inflows of cash and other net assets from owner contributions which increase equity
Owner, withdrawals
outflows of cash and other net assets to owners for personal use which reduce equity
Revenues
increase equity (via net income) from sales of products and services to customers EX. sales of products, services provided, facilities rented to others, and commissions from services
Expenses
decrease equity (via net income) from costs of providing products and services to customers. Ex. employee time, advertising, utilities
net loss
when expenses exceed revenues
net income
when revenue exceeds expenses
also called earnings or profit.
corporation
1 or more owners/called stockholders
additional corporate income tax
limited liability, stockholders are not liable as a separate legal entity
indefinite
private accounting
accounting employees working for businesses
Public accounting
offering audit, tax, and accounting services to others.
Return on Assets (ROA)
ROA = Net Income/Total Assets
What events or transactions change equity?
Owner, capital - Owner, withdrawals + Revenues - Expenses
