Chapter 1: Fundamental Financial Accounting Concepts
Temporary Accounts
Since the Revenue, Expense, and Dividend accounts are closed each period, they are called ________ _______.
Service Businesses
These businesses includes doctors, attorneys, accountants, dry cleaners, and housekeepers, provide services to their customers.
Manufacturing Businesses
These businesses make the goods that they sell to their customers.
Merchandising Businesses
These businesses, sometimes called retail or wholesale companies, sell goods to customers that other entities make.
Asset Source Transaction
This type of transaction increases the business's assets (cash) and its stockholders' equity (common stock).
Asset Exchange Transaction
This type of transaction reduces the asset account Cash and increases the asset account Land. The amount of total assets is not affected. It simply reflects changes in the composition of assets.
Accounting Period
Time span covered by the financial statements; normally one year, but may be a quarter, a month or some other time interval.
Annual Report
Organizations normally provide information, including financial statements, to stakeholders yearly in a document known as an _______ _______.
Not-for-profit entities
Organizations that are not motivated by profit.
Stakeholders
Parties interested in the operations of a business, including owners, lenders, employees, suppliers, customers, and government agencies.
International Accounting Standards Board
Private, independent body that establishes International Financial Reporting Standards (IFRS).
Liquidation
Process of dividing up an organization's assets and returning them to the resource providers. Creditors normally have first priority; after creditor claims have been satisfied, any remaining assets are distributed to the company's owners (investors).
International Financial Reporting Standards (IFRS)
Pronouncement established by the International Accounting Standards Board that provide guidance for the preparation of financial statements.
Investors
Provide financial resources in exchange for ownership interests in businesses. Owners expect businesses to return to them a share of the business including a portion of earned income.
Accounts
Record of classified and summarized transaction data; component of financial statement elements.
Revenue
Represents an economic benefit a company obtains by providing customers with goods and services.
Historical Cost Concept
Requires that most assets be reported at the amount paid for them (their historical cost) regardless of increases in market value.
Generally Accepted Accounting Principles
Rules and practices that accountants agree to follow in financial reports prepared for public distribution.
Asset Use Transactions
Decrease the total amount of assets and the total amount of claims on assets (liabilities or stockholders' equity.
Assets
Economic resource used to produce revenue which is expected to provide future benefit to the business.
Interest
Fee paid for the use of funds; represents expense to the borrower and revenue to the lender.
Income Statement
Financial reporting of profitability; measures the difference between revenues and expenses for the accounting period (whether or not cash has been exchanged).
Balance Sheet
Financial statement that reports a company's assets and the corresponding claims (liabilities and equity) on those assets as of a specific date (usually as of the end of the accounting period).
Financing Activities
include obtaining cash (inflow) from owners or paying cash (outflow) to owners (dividends).
Going Concern
A company must properly manage its assets as well as its liablitlies and stockholders' equity in order to remain a ______ _______. The ______ _______ doctrine assumes that a business is able to continue its operations into the foreseeable future.
Market
A group of people or entities organized to exchange items of value.
Transaction
A particular kind of event that involves transfering something of value between two entities. Examples: Acquiring assets from owners, borrowing money from creditors, and purchasing or selling goods or services.
Financial Accounting Standards Board
A privately funded organization with the primary authority for establishing accounting standards in the United States.
Matching Concept
Accounting principle of recognizing expenses in the same accounting period as the revenues they produce, using one of three methods; match expenses directly with revenues (e.g. cost of goods sold); match expenses to the period in which they are incurred (e.g. rent expense), and match expenses systematically with revenues (e.g. depreciation expense).
Retained Earnings
Accumulated undistributed earnings of a company retained for future needs or for future distribution to its owners.
Double-entry bookkeeping
All transactions affect the accounting equation in at least two places. It is from this practice that the ______-______ _______ system derives its name.
Accounting Event
An economic occurence that changes an enterprise's assets, liabilities, or stockholders' equity.
Expense
An economic sacrifice (decrease in assets or increase in liabilities) that is incurred in the process of generating revenue.
Accounting
An information system that reports on the economic activities and financial condition of a business or other organization.
Claims
As a result of providing assets to a business the creditors and investors are entitled to make potential _____ on the assets owned by the business.
The Accounting Equation
Assets = Liabilities + Owner's Equity?
liquidity
Assets are displayed in the balance sheet based on their level of _______. This means that assets are listed in the order of how rapidly they can be converted into cash.
Closing
At the end of the accounting period the data in these accounts are transferred to the Retained Earnings account. The process of transferring the balances is called _____.
Permanent Account
Balance sheet accounts; contain information carried forward from one accounting period to the next (ending account balance one period becomes beginning account balance next period).
Common Stock
Basic class of corporate stock that has no preferential claim on assets or dividends; certificates that evidence ownership in a company.
Labor Resources
Both intellectual and physical efforts of individuals used in the process of providing goods and services to customers.
Financial Accounting
Branch of accounting focused on the business information needs of external users (creditors, investors, governmental agencies, financial analysts, etc.); its objectives is to classify and record business events and transactions to produce external financial reports (income statement, balance sheet, statement of cash flows, and statement of changes in equity).
Financial Statements
Business communicates through four _______ _______: Income Statements, Statement of Changes in Equity, a Balance Sheet, and a statement of cash flow.
Reporting Entities
Businesses or other organizations for which financial statements are prepared.
articulation
Characteristic of financial statements that means they are interrelated. For example, the amount of net income reported on the income statement is added to beginning retained earnings as a component in calculating the ending retained earnings balance reported on the statement of changes in stockholders' equity.
Horizontal Statements Model
Concurrent representation of several financial statements horizontally across a page.
Statement of Cash Flows
Explains how a company obtained and used cash during the accounting period.
Dividend
If a business transfers some or all of its earned assets to owners, the transfer is frequently called a ______.
Net Loss
If expenses are greater than revenues, the difference is called ___ ____.
Stockholders
In accounting terms investors are called ______.
Net income
Increase in equity resulting from operating the business.
Income
Increase in value created by providing goods and services through resource transformation.
Users
Individuals or organizations that use financial information for decision making.
Investing Activities
Involve paying cash (outflow) to purchase long-term assets or receiving cash (inflow) from selling long-term assets.
Operating Activities
Involve receiving cash (inflow) from revenue and paying cash (outflow) for expenses.
Creditors
Lend financial resources to businesses. Instead of a share of the business, _____ expect the businesses to repay borrowed resources plus a specified fee called interest.
Financial Resources
Money or credit supplied to a business by investors (owners) or creditors.
Physical Resources
Natural resources businesses transform to create more valuable resources.
Statement of Changes in Stockholders' Equity
Statement that summarizes the transactions that affected the owners' equity during the accounting period.
Managerial Accounting
The accounting information needed by internal users, stakeholders, such as managers, and employees who work within a business is provided by _________ _________
Stockholders' Equity
The business' commitment to the stockholders is called __________ ________.
Earnings (net income)
The difference between revenues and expenses. Sometimes called "profit".
Elements
The information reported in financial statements is organized into ten categories known as _______.
Liabilities
The obligations a business has to its creditors.
General Ledger
The set of all accounts used in a given accounting system, typically organized in financial statement order.
Profit
Value added by transforming resources into products or services desired by customers.