accounting CH 1

Sarbanes-Oxley Act

A law passed by Congress that requires the CEO and CFO to certify that their firm's financial statements are accurate.

Basic accounting equation

Assets=Liabilities+Stockholders equity Provides the underlying framework for recording and summarizing economic events.

Financial Statements

Balance Sheet, Income Statement, Statement of Stockholders' Equity, Statement of Cash Flows, Note Disclosure

Which of the following financial statements is prepared as of a specific date?

Balance sheet.

Liabilities

Claims against assets (debts and obligations). Creditors - party to whom money is owed. Accounts payable, Notes payable, etc. Owing something to someone

Stockholders Equity =

Common Stock + Retained Earnings

external users

Ex. IRS, Investors, labor unions, creditors, SEC, customers

Internal users

Ex. management, human recourses, finance, marketing

The cost principle dictates that companies record assets at their cost. In later periods, however, the fair value of the asset must be used if fair value is higher than its cost.

False

The two most common types of external users are investors and company officers.

False

3 activities of accounting

Identification, Recording, communication

Purpose of accounting

Identify, Record, and Communicate the economic events of an organization to interested users.

Companies prepare four financial statements

Income Statement Retained Earnings Statement Balance Sheet Statement of Cash Flows

Stockholders Equity

Ownership claim on total assets. Referred to as residual equity. Common stock and retained earnings.

Forms of business ownership

Proprietorship Partnership Corporation

Assets

Resources a business owns Provide future services or benefits Cash, supplies, equipment etc. claimed by either creditors or owners.

Retained Earnings =

Revenues - Expenses - Dividends

Standard-setting bodies determine (GAAP) guidelines

Securities and Exchange Commission (SEC) Financial Accounting Standards Board (FASB) International Accounting Standards Board (IASB)

ethics

Standards of conduct by which one's actions are judged as right or wrong, honest or dishonest, fair or not fair

Generally Accepted Accounting Principles (GAAP)

Standards that are generally accepted and universally practiced. These standards indicate how to report economic events. (Very rule based)

Congress passed the Sarbanes-Oxley Act to reduce unethical behavior and decrease the likelihood of future corporate scandals.

True

The primary accounting standard-setting body in the United States is the Financial Accounting Standards Board (FASB).

True

The three steps in the accounting process are identification, recording, and communication.

True

Expenses

are the cost of assets consumed or services used in the process of earning revenue. salaries expense, rent expense, utilities expense, tax expense, etc.

Dividends

are the distribution of cash or other assets to stockholders reduce retained earnings. However, are not an expense.

Transactions

business's economic events recorded by accountants. May be external or internal. Not all activities represent transactions. Each transaction has a dual effect on the accounting equation.

A business organized as a separate legal entity under state law having ownership divided into shares of stock is a

corporation

Cost Principle

dictates that companies record assets at their cost.

Combining the activities of Kellogg and General Mills would violate the

economic entity assumption

Monetary Unit

include in the accounting records only transaction data that can be expressed in terms of money. (records in terms of money)

The Sarbanes-Oxley Act determines:

internal control standards of U.S. publicly traded companies.

Proprietorship

owned by 1 person often a small service-type business owner receives profits, suffers losses, liable for all debt

Partnership

owned by 2 or more people often retail or service-type business unlimited personal liability partnership agreement

Corporation

ownership divided into shares of stocks seperate legal entity organized under state cooperation law limited liability

IFRS is considered to be more:

principles-based and less rules-based than GAAP.

Economic Entity

requires that activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities. (activities from the entity separate from the owner)

Revenues

result from business activities entered into for the purpose of earning income. sales, fees, services, commissions, interest, dividends, royalties, and rent.

Net income will result during a time period when:

revenues exceed expenses.

Ethics are the standards of conduct by which one's actions are judged as

right or wrong, honest or dishonest, fair or not fair

Fair Value Principle

states that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability).