W3 Flashcards
GAAP principle that is about GAAP being followed thoroughly
Consistency
Raw facts, no personal biases or judgment
Objectivity
Only recording those of material value, no negligible transactions (tea, pens, etc.)
Materiality
Revenues and expenses have to be matched in the same year or period
Matching
Recording sales or expenses whenever they happen, rather than earned or received
Accruals
Only record FINANCIAL transactions, not non-financial/monetary transactions
Money measurement
Every transaction has 2 effects
Dual aspect
An accounting term for the assumption that business will go on forever (until evidence proves contrary)
Going concern
The income statement covers the REEITDN. What’s the REEITDN?
Revenue, expenses, EBIT, interest, taxes, dividend, net profit
Other name for statement of profit or loss
Income statement
What does the cash flow statement check?
The generation/amount and source of cash
What does the balance sheet check?
The size of a company
What does the income statement check?
The profitability of a business
The GAAP concept of not changing the cost of an asset despite changes to its market value
Historical cost
When you’ve registered the value of an asset and its market value changes, should you change your financial statement?
No, this is why relevance and reliability can sometimes conflict
Quality of being able to be compared with an organization’s historical financial statements or its competitors’
Comparability
Principle/quality that showcases thorough adherence to the GAAP
understandability
Qualitative characteristic that only contains the useful, helpful information
Relevance
The 4 accounting qualitative characteristics
Relevance, reliability, comparability, and understandability
The concept of overestimating risk and underestimating profit
Prudence
The differences of financial accounting and management accounting
Financial accounting is PAFEG, (past-oriented, for external users, must be GAAP-adhering) meanwhile management accounting is FFING (future-oriented, for internal users, and does not require adherence to GAAP)
Accounting equation
Assets = capital + liabilities
When a third party is legally obligated to check a business’ financial records
audit
are the amounts owed to suppliers of the business who, having supplied goods or services on credit, have not yet been paid by the business
trade payables
are the amounts owed by the customers, who having been sold goods or services to, have not yet paid the business
trade receivables
recording revenues when earned and not when received, recording expenses when incurred and not when they are paid
accruals
files recording and totaling monetary double entry records
ledgers
Credits side on a trial balance
Liabilities, income, and capital
Debits side on a trial balance
Assets, expenses, and drawings
Recording daily transactions
Book-keeping
The 3 stages of double entry book-keeping
Transactions > Books of balance > Trial balance
Why must a financial statement be comparable?
To assess if a business has become profitable compared to the past and its competitors
Conceptual framework in accounting
Accounting conventions (GAAP)
Regulatory framework in accounting
Accounting standards
Legal framework in accounting
Company law
When the business owner and the business itself are considered as 2 separate entities
Business entity
Assets which cannot be turned into cash quickly (e.g: land)
Non-current assets
Assets which can be turned into cash quickly
Current assets
Only listed companies can issue ____________.
shared capital
Sum amount of money paid to the shareholders from profits
dividend
Capital structure of a firm
Shared capital and loans (long-term debt)
Funds focus more on ______ and ______ __________.
Loans and shared capital
Funds =/= …
Profits
Profits =/= ….
Income
future-oriented, focuses on how business funds and select appropriate investments
Finance
Past-oriented, recording past entries
accounting
The meaning of “GAAP”
Generally Accepted Accounting Principles
The 3 goals/purposes of financial statements
Inform an organization of its financial position, financial performance, and cash flows to assist its users in making economic decisions; Provide insight into an organization’s current financial status on how it’s been meeting financial goals and its ability to make future cash payments; Assess the stewardship/accountability of management in regards to the resources entrusted to them
Components of financial statements (5)
Statement of financial position, statement of profit or loss, statement of changes in equity, statement of cash flow, and a set of notes to the accounts which explains the numbers in the accounts
Amount incurred by the business to operate on a day-to-day basis
Expenses
The amount earned by the business
Income
The amount of money that the owner puts into the business
Capital
An amount owed by the business
Liabilities
Items controlled by the business
Assets
The production of financial statements for the use of the external users in decision-making
financial accounting
Financial accounting
the production of financial statements for the use of the external users in decision-making
Shares are unavailable for purchase, and owned by a small group of investors
private company
A listed company, one that has made its shares available for purchase through stock exchange
Public company
2 or more individuals owning a business
Partnership
An individual that runs and is wholly responsible for their business
Sole trader
2 areas of accounting
Financial accounting and management accounting
Accounting and Finance evaluate the ______ and __________ of each form of finance and the _________ and ____________ of each forms of investment.
costs, benefits; risks, returns
Accounting and Finance assist in these 3 activities
Planning, decision-making, and controlling
Outflows > Inflows
Negative cash flow
Positive cash flow
Inflows > outflows
The movement of money in and out of a company
Cash flow
how well a business can make use of its assets and generate revenue from its main mode of business
Financial performance
presents balances of a company’s assets, liabilities, and equity
Statement of financial position (Balance sheet)
Relevance of accounting and finance
In how they provide information about an organization’s financial position, performance, and its cash flow
Are both concerned with the financial aspects of decision-making, closely related, and overlap each other considerably
Accounting and Finance
Internal users and external users
Managers, employees; creditors, investors, and regulators
Through what medium does accounting communicate information?
Financial statements
What details does a source document contain?
Name of parties, amount paid, substance of transaction, and a unique number for identification in the accounting system.
An original document containing the details of a business transaction
Source document
What is accounting?
The process of identifying and measuring source documents, recording, classifying, and summarizing accounting books/records, and communicating information through financial statements to help managers make informed decisions and judgments
