Intro to Accounting Chapter 1

What are financial statements?

Financial statements are periodic reports of a firm's financial position and operating results

What are generally accepted accounting principles (GAAP)?

accounting standards developed and applied by professional accountants

Suppliers

assess the firm's ability to pay its bills and set a credit limit for the firm

The review of financial statements to assess their fairness and adherence to GAAP is

auditing

The Sarbanes-Oxley Act includes rules on

auditor rotation

Management advisory services are designed to help

clients

Owners are not personally responsible for the debts of the business if the form of business organization is a

corporation

Banks

decide whether to make a loan and determine the terms of the loan

What is the separate entity assumption?

the concept of keeping a firm's financial records separate from the owner's personal financial records

Separate Entity Assumption

the concept that a business is separate from its owners; the concept of keeping a firm's financial records separate from the owner's personal financial records

Creditors

the people, companies, or governmental agencies to whom a business owes money

tax authorities

use financial information to determine the tax base for income taxes, sales taxes, and property taxes

An independent accountant who is licensed by the state and provides accounting services to the public for a fee is a

CPA

Accountants can choose to practice

-public accounting -managerial accounting -governmental accounting

Sarbanes-Oxley Act

A law passed by Congress that requires the CEO and CFO to certify that their firm's financial statements are accurate. Cracked down on corporate fraud and corruption

The government agency that has final authority over the financial reporting of publicly owned corporations is the

Securities and Exchange Commission

SEC

The government agency that has final authority over the financial reporting of publicly owned corporations is the

Auditing

The review of financial statements to assess their fairness and adherence to generally accepted accounting principles.

What is a corporation?

a publicly or privately owned business entity that is separate from its owners and has a legal right to own property and do business in its own name. Stockholders are not responsible for the debts or taxes of the business

All financial statements submitted to the SEC by publicly owned corporations must include an auditor's report prepared by

an independent certified public accountant

Tax accounting involves tax compliance and

tax planning

Financial Accounting Standards Board (FASB)

the private board that establishes the generally accepted accounting principles used in the practice of financial accounting

What does an accountant do with an accounting system?

-Establishes the records and procedures that make up the accounting system -Supervises the operations of the system -Interprets the resulting financial information

What is a Partnership?

A business in which two or more persons combine their assets and skills who are legally responsible for the debts and taxes of the business

Economic entity

A business or organization whose major purpose is to produce a profit for its owners.

Who is a certified public accountant?

A certified public account, or CPA, is an independent accountant who provides accounting services to the public for a fee

accounting system

A process designed to accumulate, classify, and summarize financial data.

Exposure Draft

A proposed solution to a problem being considered by the Financial Accounting Standards Board.

What is accounting?

Accounting is the process by which financial information about a business is classified, recorded, summarized, interpreted, and communicated to owners, managers and other interested parties.

Accounts Payable

Amounts to be paid in the future for goods or services already acquired

Accounts Receivable

Amounts to be received in the future due to the sale of goods or services

Discussion Memorandum

An explanation of a topic under consideration by the Financial Accounting Standards Board.

entity

Anything having its own separate identity, such as an individual, a town, a university, or a business.

Auditor's Report

Contains the auditor's opinion about the fair presentation of the operating results and financial position of the business.

What is governmental accounting?

Governmental accounting involves keeping financial records and preparing financial reports for a federal, state, or local governmental unit

Which of the following is NOT an area in which accountants usually practice?

Industrial Accounting

Which of the following is a true statement in regards to the International Accounting Standards Board?

The IASB deals with issues caused by the lack of uniform accounting principles existing in different countries

What is the SEC responsible for?

The SEC is responsible for reviewing the accounting methods used by publicly owned corporations. The SEC has delegated this review to the accounting profession but still has the final say on any financial accounting issue faced by publicly owned corporations. If the SEC does not agree with the reporting that results from an accounting method, the SEC can suspend trading of a company's shares on the stock exchanges.

Internal Revenue Service (IRS)

The branch of the U.S. Treasury Department in charge of collecting taxes

Accounting

The process by which financial information about a business is recorded, classified, summarized, interpreted, and communicated to owners, managers, and other interested parties.

Tax Planning

The structuring of transactions to reduce tax costs or increase tax savings to maximize net present value.

International Accounting

The study of accounting principles used by different countries.

An example of an economic entity is

a business

What is a Sole Proprietorship?

a business owned and managed by a single individual who is legally responsible for the debts and taxes of the business

What is an auditor's report?

accompanies an independent accountant's audit or review of a firm's financial statements.

Which of the following is NOT a type of information communicated by the financial statements?

how long the business has been in operation

What is stock?

issued in the form of stock certificates and represents the ownership of the corporation

What is managerial accounting?

managerial accounting includes a wide range of work carried on by an accountant employed by a single business in industry

Securities and Exchange Commission (SEC)

monitors the stock market and enforces laws regulating the sale of stocks and bonds

creditor

one to whom money is owed

regulatory agencies and investors

public corporations are those whose stock is traded on stock exchanges and over-the-counter markets

Book-keeper

responsible for recording business transactions

Accounting clerk

responsible for recordkeeping for a part of the accounting system