Chapter 1

Forensic Accounting

A branch of accounting that involves investigations that result from actual or anticipated disputes such as criminal activity.

Conceptual Framework

A cohesive set of interrelated objectives, elements, and recognition and measurement criteria for the GAAP developed by the FASB.

Financial Statement Elements

A component of the conceptual framework that identifies the significant components—assets, liabilities, stockholders' equity, revenues, and expenses—used to prepare financial statements.

Financial Reporting Objectives

A component of the conceptual framework which specifies that financial statements should provide information that is 1) useful for investment and credit decisions, 2) helpful in assessing an entity's ability to generate future cash flows, and 3) about an entity's resources, and the effects of events causing changes in these items.

Blockchain

A digital ledger that provides a secure means, for those that have permission, to view recorded transactions.

Period-in-Time Statements

A financial statement accumulating information for a specific period of time; examples include the income statement, the statement of stockholders' equity, the statement of retained earnings, and the statement of cash flows.

Point-in-Time Statement

A financial statement presenting information as of a particular date; the balance sheet is a point-in-time statement.

Statement of Stockholders' Equity

A financial statement presenting information regarding the events that cause a change in stockholders' equity during a period. The statement presents the beginning balance, additions to, deductions from, and the ending balance of stockholders' equity for the period.

Income Statement

A financial statement reporting a business' sales revenue and expenses for a given period of time.

Balance Sheet

A financial statement showing a business' assets, liabilities, and stockholders' equity as of a specific date.

Statement of Cash Flows

A financial statement showing cash inflows and outflows for a specific period, classified into operating, investing, and financing activities categories.

Sole Proprietorship

A form of business organization in which one person owns the business.

Triple Bottom Line

A form of reporting that captures an expanded set of measures in addition to traditional financial reporting. The three bottom lines include economic, ecological, and social.

Corporation

A legal entity created under the laws of a state or a federal government. The owners of a corporation receive shares of stock as evidence of their ownership interest in the company.

New York Stock Exchange (NYSE)

A marketplace, located in New York City, for the buying and selling of corporate shares.

Financial Accounting Standards Board (FASB)

A private, not-for-profit organization whose task it to develop generally accepted accounting principles in the United States.

Certified Public Accountants (CPAs)

A professional designation given to an accountant who has fulfilled stringent licensing requirements.

Relevance

A qualitative characteristic of accounting information; relevant information contributes to the predictive and evaluative decisions made by finical statement users.

Public comapny Accounting Oversight Board (PCAOB)

A quasi-governmental agency established by the Sarbanes-Oxley Act to overhaul auditing standards, inspect the work of accounting firms, and discipline independent auditors that fail to meet and maintain acceptable standards of audit performance.

Annual Report

A report containing the financial statements that is sent to a company's shareholders.

Financing Activities

A section in the statement of cash flows that reports cash flows associated with obtaining cash from owners and creditors, returning cash to owners, and repaying amounts borrowed.

Operating Activities

A section in the statement of cash flows that reports cash flows from all activities that are not classified as investing or financing activities.

Investing Activities

A section in the statement of cash flows that reports cash flows involving 1) the purchase and sale of plant assets and intangible assets, 2) the purchase and sale of stocks, bonds, and other securities (other than cash equivalents), and 3) the lending and subsequent collection of money.

Sarbanes-Oxley Act (SOX)

A set of legislative rules enacted in 2002 to provide stricter guidance over corporate behavior. The legislation was a reaction to the infamous accounting scandals at Enron and WorldCom.

Generally Accepted Accounting Principles (GAAP)

A set of standards and procedures that guide the preparation of financial statements.

Equity Financing

A source of financing for a company involving the sale of shares of common stock.

Debt Financing

A source of financing for a company involving the use of debt, such as a bank loan or the issuance of bonds.

Partnership

A voluntary association of two or more persons for the purpose of conducting a business.

Accrual Basis of Accounting

Accounting procedures whereby sales revenue is recorded as goods are transferred to customers or services are performed and expenses are recorded in the period in which they help to generate the sales revenue.

Cash Basis of Accounting

Accounting procedures whereby sales revenue is recorded when cash is received from operating activities and expenses are recorded when cash payments related to operating activities are made.

Monetary Unit Concept

An accounting guideline that reports assets, liabilities and stockholders' equity in the basic unit of money.

Materiality

An accounting guideline that states that insignificant data that would not affect a financial statement user's decisions may be recorded in the most expedient manner.

Expense Recognition (Matching) Principle

An accounting guideline that states that net income is determined by relating expenses to the sales revenues generated by the expenses.

Revenue Recognition Principle

An accounting principle requiring that sales revenues be recognized when services are performed or goods are sold.

Consistency

An accounting principle stating that accounting reports should be prepared on a basis consistent with the prior periods.

Cost Principle

An accounting principle stating that asset measures should be based on the price paid to acquire an asset.

Full Disclosure Principle

An accounting principle stipulating that all facts necessary to make financial statements useful should be disclosed in a firm's annual report.

Going Concern Concept

An accounting principle that assumes that, in the absence of evidence to the contrary, a business enterprise will have an indefinite life.

Ethics

An area of inquiry dealing with the values, rules, and justifications that govern an individual's way of life or a corporation's behavior.

American Institute of Certified Public Accountants (AICPA)

An association representing members of the accounting profession in many areas of practice, including business and industry, public practice, government, eduction, and consulting.

Institute of Management Accountants (IMA)

An association representing members who work in management accounting, including jobs in decision support, planning and control positions.

Accounting Entity

An economic unit with identifiable boundaries that is the focus for the accumulation and reporting of financial information.

Accounting Equation

An expression of the equivalency of the economic resources and the claims upon those resources of a business, often stated as Assets = Liabilities + Stockholders' Equity.

International Accounting Standards Board (IASB)

An independent accounting standard-setting agency whose purpose is to develop international financial accounting standards.

U.S. Securities and Exchange Commission (SEC)

An independent agency of the U.S. federal government responsible for enforcing the federal securities laws, proposing securities rules, and regulating the securities industry.

Creditor

An individual or financial institution that lends money or services to a company with the exception of receiving repayment in the future.

International Financial Reporting Standards (IFRS)

An international set of accounting standards, interpretations, and the framework for the preparation and presentation of financial statements used in many countries.

Stockholder

An owner of a corporation as a result of the purchase of the corporation's shares of stock; also known as a shareholder.

Principle

As it relates to debt financing, the amount initially borrowed from the creditor.

Earned Capital

Capital that is earned by a company and not distributed to its stockholders as a dividend; referred to as retained earnings.

Expenses

Decreases in stockholders' equity incurred by a firm during the process of generating its sales revenues.

Governmental Accounting Standards Board (GASB)

Established by the Financial Accounting Foundation in 1984 to develop guidelines for financial accounting and reporting by state and local governmental units.

a) A set of guidelines to aid in the financial reporting process

Generally accepted accounting principles are: a) A set of guidelines to aid in the financial reporting process b) A set of laws to prevent financial fraud c) A set of standards for ethical conduct d) A set of voluntary "best business practices"

c) $100,000

If Bing Company reports its year-end total liabilities to be $40,000, and its year-end stockholders' equity to be $60,000, how much are Bing Company's year-end total assets? a) $15,000 b) $185,000 c) $100,000 d) Cannot be determined from the given information

b) $90,000

If assets total $140,000 and liabilities total $50,000, how much are net assets? a) $40,000 b) $90,000 c) $140,000 d) $50,000

Sales Revenue

Increases in stockholders' equity that result when a firm provides goods or services to its customers.

1) a and b 2) a and b 3) b 4) c 5) c 6) a

Match the following organizational attributes with the organizational forms of a) Sole Proprietorship, b) Partnership, and c) Corporation that the attribute is most often associated with. 1) Tax advantages 2) Unlimited liability 3) Shared control 4) Most complex to set up 5) Easiest to raise a large amounts of funds 6) Single owner

Net Loss

Occurs when total expenses excess sales revenue.

Management's Discussion and Analysis

Part of the 10-K report that contains management's interpretation of the company's recent past performance along with discussion pf possible future opportunities and risks.

b) $35,000

Puff Company began the year with a retired earnings balance of $50,000, reported net income for the year of $45,000, and reported ending retained earnings of $60,000. How much dividends did Puff Company report for the year? a) $135,000 b) $35,000 c) $15,000 d) $30,000

Understandability

Reports should be presented in a manner that makes it easy for the user to comprehend their meaning.

Cost-Benefit Constraint

Requires that the benefits derived from accounting information are greater than the cost of providing the information.

Generally Accepted Auditing Standards (GAAS)

Standards that identify necessary qualifications and characteristics of auditors and guide the conduct of the audit examination created by the Public Company Accounting Oversight Board (PCAOB).

Managerial Accounting

The accounting activities carried out by a firm's accounting staff primarily to provide management with accounting data for decisions related to a firm's operations.

Notes to the Financial Statements

The annual report section following the four financial statements that includes a description of the assumptions and estimates that were used in preparing the statements, the measurement procedures that were followed, and the details behind the summary numbers.

Form 10-K

The annual report that publicly traded companies must file with the U.S. Securities and Exchange Commission (SEC).

Financial Accounting

The area of accounting dealing with the preparation of financial statements showing a business' results of operations, financial portion, and cash flow.

Contributed Capital

The capital contributed to a company by stockholders when they purchase shares of stock from the company.

Qualitative Characteristics of Accounting Information

The characteristic of accounting information that contribute to decision usefulness; the primary qualities are relevance and faithful representation.

Recognition and Measurement Criteria

The criteria that must be met before a financial statement element may be recorded in the accounts. Essentially, the item must meet the definition of an element and must be measurable, and the resultant information about the item must be relevant and reliable.

Net Assets

The difference between a business's assets and liabilities. Net assets are equal to stockholders' equity.

Retained Earnings

The earnings of a corporation that have been retained in the corporation (have not been paid out as a dividend) for future corporate use.

Assets

The economic resources of a business that can be expressed in money terms.

Net Income

The excess of a business' sales revenues over its expenses.

c) $19,000

The financial statements of People Company contain the following. Accounts Payable $12,000 Revenues $27,000 Accounts Receivable $10,000 Expenses $8,000 Cash $7,000 How much is net income? a) $6,000 b) $11,000 c) $19,000 d) $17,000

Faithful Representation

The fundamental qualitative characteristic that requires a depiction to be complete, neutral, and free from error such that it depicts the phenomena it purports to represent.

Liabilities

The obligations or debts that a business must pay in money or services at some time in the future as a consequence of past transactions or events.

Data Analytics

The process of examining sets of data with the goal of discovering useful information from patterns found in the data.

Accounting

The process of measuring the economic activity of a business in money terms and communicating these financial results to interested parties. The purpose of accounting is to provide financial information that is useful in economic decision making.

Comparability

The qualitative characteristic that enables users to determine similarities and differences among items.

Auditor's Report

The report pf the independent auditor that describes the activities undertaken by a company's outside auditor that reports the auditor's opinion regarding whether the financial statements fairly present the results pf the company's operations and financial health.

Stockholders' Equity

The residual interest in the assets of a business after all liabilities have been paid off; stockholders' equity is equal to a firm's net assets, or total assets less total liabilities.

Accounting Period

The time period, usually one year, to which periodic accounting reports are related; also known as the fiscal period.

b) Financial accounting

To which area of accounting are generally accepted accounting principles primarily relevant? a) Managerial accounting b) Financial accounting c) Tax accounting d) Financial reporting to all regulatory agencies

b) Revenues

What are increases in resources that a firm earns by providing goods or services to its customers? a) Assets b) Revenues c) Expenses d) Liabilities

c) Corporation

Which form of business organization is characterized by limited liability? a) Sole Proprietorship b) Partnership c) Corporation d) Both sole proprietorship and partnership

c) Marketing

Which of the following is not one of the three types of business activities? a) Investing b) Financing c) Marketing d) Operating

c) Detailed history of the company

Which of the following items is not required to be included as part of a company's annual report? a) Notes to the financial statements b) Management discussion and analysis c) Detailed history of the company d) Auditor's report

d) Both a and b

Which of the following processes best defines accounting? a) Measuring economic activities b) Communicating results to interested parties c) Preventing fraud d) Both a and b

d) All of the above present ethical challenges to accountants

Which of the following situations presents ethical challenges to accountants? a) Pressure by superiors to produce a "good" number b) Avoiding the disclosure of confidential information c) An emphasis on short-term results d) All of the above present ethical challenges to accountants