financial accounting chapter 1

4 forms of business entity

- Sole proprietorship - Partnership - Corporation - Limited Liability Company (LLC)

LLC

A business form consisting of one or more persons or entities filing an operating agreement with a state to conduct business with limited liability to the owners, yet treated as a partnership for tax purposes.

business

A business is an organization in which basic resources (inputs), such as materials and labor, are assembled and processed to provide goods or services (outputs) to customers.

corporation

A business organized under state or federal statutes as a separate legal entity.

Proprietorship

A business owned by one individual.

Faithful representation

A characteristic of financial reports that pertains to information accurately reflecting an entity's economic activity or condition.

business entity assumption

A concept of accounting that limits the economic data in the accounting system to data related directly to the activities of the business.

historical cost principle

A concept of accounting that states that an asset should be recorded and maintained in the accounting records at its initial transaction price.

revenue recognition principle

A concept of accounting that states that revenues are recorded when earned, which is when the services have been performed or products have been delivered to customers.

Natural business year

A fiscal year that ends when business activities have reached the lowest point in an annual operating cycle.

Balance sheet

A list of the assets, liabilities, and stockholders' equity as of a specific date, usually at the close of the last day of a month or a year.

Public Company Accounting Oversight Board (PCAOB)

A new oversight body for the accounting profession that was established by the Sarbanes-Oxley Act.

expense recognition principle

A principle, sometimes called the matching principle, that requires expenses to be recorded in the same period as the related revenue; a concept of accounting in which expenses are matched with the revenue generated during a period by those expenses.

Verifiability

A secondary characteristic of financial information that allows users to agree on the meaning of reported items.

Understandability

A secondary characteristic of financial information that requires clear and concise financial reports that facilitate user interpretation and analysis.

Timeliness

A secondary characteristic of financial information that requires distribution of financial reports in time to influence a user's decision.

Comparability

A secondary characteristic of financial information; comparability includes consistent reporting, that allows users to identify similarities and differences among reported items.

Statement of cash flows

A summary of the cash receipts and cash payments for a specific period of time, such as a month or a year.

Statement of stockholders' equity

A summary of the changes in the stockholders' equity in a corporation that have occurred during a specific period of time, such as a month or a year.

Income statement

A summary of the revenue and expenses for a specific period of time, such as a month or a year.

General-purpose financial statements

A type of financial accounting report that is distributed to external users. The term "general purpose" refers to the wide range of decision-making needs that the reports are designed to serve.

Public Accounting

Accountants employed individually or within a public accounting firm in audit and tax services.

time period assumption

An accounting assumption that allows a company to report its economic activities on a regular basis for a specific period of time.

monetary Unit Assumption

An accounting assumption that requires that financial reports be expressed in a single monetary unit, or currency.

Sarbanes-Oxley Act

An act passed by Congress to restore public confidence and trust in the financial statements of companies.

Securities and Exchange Commission (SEC)

An agency of the U.S. government that has authority over the accounting and financial disclosures for companies whose shares of ownership (stock) are traded and sold to the public.

accounts recievable

An asset, which is a claim against the customer created by selling merchandise or services on credit.

going concern assumption

An assumption that requires that financial reports be prepared assuming that the entity will continue operating in the future.

Accounting Standards Codification

An electronic database maintained by the Financial Accounting Standards Board (FASB) that contains all of the accounting standards that make up the generally accepted accounting principles (GAAP).

International Accounting Standards Board (IASB)

An organization that issues International Financial Reporting Standards for many countries outside the United States.

Partnership

An unincorporated business form consisting of two or more persons conducting business as co-owners for profit.

Accounting equation

Assets = Liabilities + Equity

prepaid expenses

Assets created by making advanced payments for expense items, such as insurance premiums or supplies, that will be used in the business in the future.

Accounting Fraud of countrywide

CEO misled investors.

common stock

Certificates issued by a corporation to investors as proof of their ownership rights; an account representing the ownership rights of investors in a corporation; a class of stock issued by a corporation that bears no preference rights.

Descriptive analytics

Describes and summarizes outcomes.

dividends

Distributions of earnings to stockholders; an account representing the distribution of a corporation's earnings to stockholders.

Rent revenue

Earnings from property that is leased to others for use.

Assets

Examples of assets include cash, land, buildings, and equipment

Financing activities

Financing activities include activities by which the company obtains funds to start and operate the company. Funds are normally obtained from creditors and owners. For example, companies can obtain funds by issuing stock to the public

Accounting Fraud of Enron

Fraudulently inflated its financial results.

generally accepted accounting principles (GAAP).

GAAP is a collection of accounting standards, principles, and assumptions that define how financial information will be reported.

How does accounting provide info?

Identify users. Assess users' information needs. Design the accounting information system to meet users' needs. Record economic data about business activities and events. Prepare accounting reports for users.

Accounting Fraud of Wells Fargo

Improperly opened customer accounts without their permission.

Investing Activities

Investing activities are those activities by which a company acquires long-term assets for use in the operating activities of the company. For example, the acquisition by Delta Air Lines, Inc. (DAL) of Boeing 787 and Airbus 321 airplanes is an investing activity. Likewise, the purchase of land and the construction of buildings to use for training, maintenance, flight monitoring, and corporate offices are investing activities.

Manufacturing Business

Manufacturing businesses change basic inputs into products that are sold to customers. Ex. Ford

Accounting Fraud of Goldman Sachs

Misstated and omitted key facts from investors.

Ethics

Moral principles that guide the conduct of individuals.

Operating Activities

Operating activities are those activities by which the company generates revenues from customers. Operating activities include producing, marketing, and distributing a product or service to customers. For dell technologies this would include product development, acquiring component parts, assembly, marketing, and distribution of its products.

profit

Profit is the difference between the amounts received from customers for goods or services and the amounts paid for the inputs used to provide the goods or services.

Certified Public Accountants

Public accountant who has met a state's education, experience, and examination requirements.

Accounting Fraud of Xerox corp

Recognized $3 billion in sales prior to when it should have been recorded.

Prescriptive analytics

Recommends future actions for achieving company goals and objectives.

Retail Businesses

Retail businesses sell products they purchase from other businesses to customers. Ex. Walmart, Target.

fees earned

Revenue from providing services

service businesses

Service businesses provide services rather than products to customers. EX. Delta air lines. Walt Disney Company

Fiscal Year

The annual accounting period adopted by a business.

managerial accounting

The area of accounting that provides internal users with information

Financial Accounting Standards Board (FASB)

The authoritative body that has the primary responsibility for developing accounting principles. - Maintains the Accounting Standards Codification

Financial accounting

The branch of accounting that is concerned with recording transactions using generally accepted accounting principles (GAAP) for a business or other economic unit and with a periodic preparation of various statements from such records.

private accounting

The field of accounting whereby accountants are employed by a business firm or a not-for-profit organization.

account payable

The liability created by a purchase on account.

stockholders' equity

The ownership rights of stockholders in a corporation; the stockholders' rights to the assets in a corporation.

Liabilities

The rights of creditors that represent debts of the business. (Amount owed to creditors)

DAta Analytics

The science of analyzing large amounts of raw data, sometimes called "big data," to discover patterns, identify anomalies, or gain other useful insights for decision making.

Retained earnings

The stockholders' equity created from business operations through revenue and expense transactions; an account representing the net income retained in a corporation.

arm's-length transactions

Transactions between two independent parties.

diagnostic analytics

Tries to explain results by identifying relationships among data.

Predictive analytics

Uses statistical methods to predict future outcomes.

Low cost Strategy

Using a low-cost strategy, a company offers product(s) to customers at a lower cost (price) than its competitors. EX. Southwest Air

product differentiation strategy

Using a product-differentiation strategy, a company distinguishes its product(s) in such a way that it is desirable to customers and uniquely different from its competitor's. Ex. Apple

Accounting

accounting can be defined as an information system that provides reports to users about the economic activities and condition of a business.

Accounting standards

are the rules that determine the accounting for individual business transactions.

Accounting principles and assumptions

provide the framework upon which accounting standards are constructed.