Unit 2 Flashcards
4 components of Accounting
Quantitative
Financial
Useful
Decisions
4 steps in decision making process
Identify issue
Gather info
Identify alternatives
Choose best option
Capital/Financing
Money needed by buy resources to run a business
3 sources of capital
Investors (owners)
Creditors (lenders)
Business retained earnings
Two roles of accountants
Measuring and reporting
Advising
Accounting cycle
analyzing, recording, classifying, summarizing, and reporting the transactions of a business.
Managerial vs Financial accounting
Managerial - for internal users, more detailed
Financial - for external, summary reporting
3 types of financial statements
Balance sheet - reports assets, liabilities, equity (assets-liabilities)
Income statement - net income
Statement of cash flows - cash in/out among operations, investing, financing
External stakeholders
Lenders
Investors
Competitors
Federal, State, Local Government Agencies
Internal stakeholders
Management
Suppliers
Customers
Employees
3 elements in Accounting Environment
Organizations
Ethics
Technology
Organization that sets accounting standards for publicly listed firms
FASB Financial Accounting Standards Board private, no legal power to enforce gets authority from SEC balance revelatory needs of external users with privacy needs for firms
Rules created by FASB
GAAP
Agency that sets accounting rules for government
GASB
SEC
make sure investors get full fair information
can take over FASB if needed, per SOX
two uses of CPA
CPA individual - passed CPA exam by AICPA
CPA firm - performs accounting services, does audits
Agency that harmonizes conflicting national accounting standards among nations
IASB
3 functions of an accounting system
Analysis - analyze business events to determine if info should be recorded in accounting system
Bookkeeping - keeping track of info
Evaluation - summary info used to evaluate financial health and performance of a business
Purpose of accounting cycle
see how accounting system turns transactions into financial statements
4 steps in accounting cycle
- Analyzing transaction - determine economic essence, need system
- Record effects of transaction - need code that captures essence of transaction ie debits and credits
- Summarize effects of transactions - posting journal entries, preparing trial balance, distill essence
- Prepare Reports - Determine what decision makers need to know, adjust entries, prepare financial statements, close books
Good rule for determining if an item has to go into the accounting records
measurable
framework of accounting allows us to break complex transactions into parts
arms length transaction
buyer seller have equal bargaining power and can act independently
accounting equation
assets = liabilities + equity
account
place to record effects of all transactions that are related to a certain item
ie cash, accounts payable, employee wage expense
page in a book
colums/details in balance sheet
Net income equation
revenue - expenses
temporary account
revenues and expenses
revenue increase equity
expenses reduce equity
