Chapter 1 - Prin. of Acct 1

Corporation

A business organized as a separate legal entity under state corporation law, having ownership divided into transferable shares of stock.

Proprietorship

A business owned by one person.

Partnership

A business owned by two or more persons associated as partners.

Balance sheet

A financial statement that reports the assets, liabilities,

Statement of cash flows

A financial statement that summarizes information about the cash inflows (receipts) and cash outflows (payments) for a specific period of time.

Owner's equity statement

A financial statement that summarizes the changes in owner's equity for a specific period of time.

Securities and Exchange Commission (SEC)

A governmental agency that oversees US financial markets and accounting standard-setting bodies.

Bookkeeping

A part of accounting that involves only the recording of economic events.

Financial Accounting Standards Board (FASB)

A private organization that establishes generally accepted accounting principles (GAAP).

Liabilities

Creditor claims on total assets..

Relevance

Financial information that is capable of making a difference in a decision.

Income statement

Financial statement that presents the revenues and expenses and resulting net income or net loss of a company for a specific period of time.

Explain generally accepted accounting principles...

Generally accepted accounting principles (GAAP) - are a common set of standards used by accountants.

Faithful representation

Numbers and descriptions match what really existed or happened - it is factual.

Assets

Resources a business owns.

Drawings

Withdrawal of cash or other assets from an un-incorporated business for the personal use of the owner(s).

Net loss

The amount by which expenses exceed revenues

Net income

The amount by which revenues exceed expenses.

Investments by owner

The assets an owner puts into the business.

Expenses

The cost of assets consumed or services used in the process of earning revenue.

Transaction

The economic events of a business that recorded by accountants.

Auditing

The examination of financial statements by a certified public accountant in order to express an opinion as to fairness of presentation.

Financial accounting

The field of accounting that provides economic and financial information for investors, creditors, and other external users.

Managerial accounting

The field of accounting that provides internal reports to help users make decisions about their companies.

Understand the four financial statements and how they are prepared...

An Income Statement (IS) presents the revenues and expenses, and resulting net income or net loss, for a specific period time. An owner's equity (OE) statement summarizes the changes in owner's equity for a specific period time. A balance sheet (BS) reports the assets, liabilities, and owner's equity at a specific date. A statement of cash flows summarizes information about the cash inflows (receipts) and outflows (payment) for a specific period of time.

Fair value principle

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

Cost principle

An accounting principle that states that companies should record assets at their cost.

International Accounting Standards Board (IASB)

An accounting standard-setting body that issues standards adopted by many counties outside of the US.

Public accounting

An area of accounting in which the accountant offers expert service to the general public.

Forensic accounting

An area of accounting that uses accounting, auditing, and investigative skills to conduct investigations into theft and fraud.

Private (or managerial) accounting

An area of accounting within a company that involves such activities as cost accounting, budgeting, design, and support of accounting information systems, and tax planning and preparation.

Taxation

An area of public accounting involving tax advice, tax planning, preparing tax returns, and representing clients before governmental agencies.

Management consulting

An area of public accounting ranging from development of accounting and computer systems to support services for marketing projects and merger and acquisition activities.

Monetary unit assumption

An assumption stating that companies include in the accounting records only transaction data that can be expressed in terms of money.

Economic entity assumption

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

Basic accounting equation

Assets= Liabilities + Owner's equity

State the accounting equation, and define its components...

Assets= Liabilities - Owner's Equity Assets are resources a business owns. Liabilities are what is owed. Owner's equity in the ownership claim on total assets. Assets= Liabilities + Owner's Capital - Owner's Drawings + Revenue - Expenses Owner's capital is assets the owner puts into the business. Owner's drawings are the assets the owner withdraws for personal use. Revenues are increases in assets resulting from income-earning activities. Expenses are the costs of assets consumed or services used in the process of earning revenue.

Expanded accounting equation

Assets= Liability + Owner's Capital - Owner's Drawings + Revenues - Expenses.

Revenues

The gross increase in owner's equity resulting from business activities entered into for the purpose of earning income.

Accounting

The information system that identifies records and communicates the economic events of an organization to interested users.

Identifying the users and uses of accounting...

The major users and uses of accounting are as follows: (a) Management uses accounting information to plan, organize, and run the business. (b) Investors (owners) decide whether to buy, hold, or sell their financial interests on the basis of accounting data. (c) Creditors (suppliers and bankers) evaluate the risks of granting credit or lending money on the basis of accounting information. Other groups that use accounting information are taxing authorities, regulatory agencies, customers, and labor unions.

Explain the monetary unit assumption and the economic entity assumption...

The monetary unit assumption requires that companies include in the accounting records only transaction data that can be expressed in terms of money. The economic entity assumptions requires that activities of each economic entity be kept separate from the activities of its owner(s) and other economic entities.

Owner's equity

The ownership claim on total assets

Convergence

The process of reducing the differences between GAAP and IFRS.

Ethics

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

Understand why ethics is a fundamental business concept...

Ethics are the standards of conduct by which actions are judged as right or wrong. Effective financial reporting depends on sound ethical behavior.

Explain what accounting is...

Accounting is an information system that identifies, records, and communicates the economic events of an organization to interested users.

Explain the career opportunities in accounting...

Accounting offers many different jobs in fields such as public and private accounting, government, and forensic accounting. Accounting is a popular major because there are many different types of jobs with unlimited potential for career advancement.

Analyze the effects of business transactions on the accounting equation...

Each business transaction must have a dual effect on the accounting equation. For example, (1) decreases in another asset, or (2) increase in a specific liability or (3) increase in owner's equity.

Sarbanes-Oxley Act of 2002 (SOX)

Law passed by Congress in 2002 intended to reduce unethical corporate behavior.