Accounting ch1

A system of maintaining records of a company's operations and communicating that information to decision makers.

Accounting

Assets = Liabilities + Stockholders Equity

Accounting Equation

Resources owned by a company

Assets

Trained individuals hired by a company as an independent party to express a professional opinion of the accuracy of the company's financial statements.

Auditors

A financial statement that presents the financial position of the company on a particular date. It demonstrates a company's A = L + SE

Balance Sheet

The ability of users to see similarities and differences between two different business activities.

Comparability

The use of similar accounting procedures either over time for the same company, or across companies at the same point in time.

Consistency

An entity that is legally separate from its owners.

Corporation

Financial accounting information is provided only when the benefits of doing so exceed the costs.

Cost Effectiveness

The ability of the information to be useful in decision making.

Decision Usefulness

Financial accounting serves an important role by providing information useful in investment and lending decisions.

Describe the role that financial accounting plays in the efficient distribution of society's resources?

The functions of financial accounting are to measure business activities of a company and to communicate information about those activities to investors and creditors and other outside users for decision-making purposes.

Describe the two primary functions of financial accounting?

Cash payments to stockholders

Dividends

All economic events with a particular economic entity can be identified.

Economic entity assumption

A code or moral system that provides criteria for evaluating right and wrong behavior.

Ethics

Costs of providing products and services.

Expenses

The rules of financial accounting are called generally accepted accounting principles (GAAP). The Financial Accounting Standards Board (FASB) is an independent, private body that has primary responsibility for the establishment of GAAP in the United States.

Explain the term generally accepted accounting principles (GAAP) and describes the role of GAAP in financial accounting

One of the two primary decision-specific qualitative characteristics that make accounting information useful. Accounting information that is complete, neutral, and free from material error.

Faithful Representation

Measurement of business activities of a company and communication of the measurements to external parties for decision-making purposes.

Financial Accounting

An independent, private body that has primary responsibility for the establishment of GAAP in the United States.

Financial Accounting Standards Board (FASB)

Periodic reports published by the company for the purpose of providing information to external users

Financial Statements

FINANCING activities include transactions with lenders and owners. INVESTING activities generally include the purchase or disposal of productive assets. OPERATING activities relate to earning revenues and incurring expenses.

Identify the three fundamental business activities that financial accounting measures?

A financial statement that reports the company's revenues and expenses over an interval of time.

Income Statement

Amounts owed to creditors

Liabilities

The impact of financial accounting information on investors' and creditors' decisions

Materiality

Difference between revenues and expenses Net Income= Revenues-Expense

Net Income

Business owned by two or more persons

Partnership

Accounting information that possesses confirmatory value and/or predictive value

Relevance

Cumulative amount of net income earned over the life of the company that has not been distributed to stockholders as dividends

Retained Earnings

Amounts earned from selling products or services to customers

Revenues

A business owned by one person

Sole Proprietorship

A financial statement that measures activities involving cash receipts and cash payments over an interval of time

Statement of Cash Flows

A financial statement that summarizes that changes in stockholder's equity over an interval of time

Statement of Stockholder's Equity

Stockholders', or owners' claims to resources, which equal the difference between total assets and and total liabilities

Stockholder's Equity

Information being available to users early enough to allow them to use it in the decision process

Timeliness

Users must understand the information within the context of the decision they are making

Understandability

A consensus among different measures

Verifiability

Economic Entity Assumption- All economic events with a particular economic entity can be identified Monetary Unit Assumption- A unit or scale of measurement can be used to measure financial statement elements Periodicity Assumption- The economic life of an enterprise (presumed to be indefinite) can be divided into artificial time periods for financial reporting Going Concern assumption- In the absence of information to the contrary, a business entity will continue to operate indefinitely

What are the four assumptions that underlie GAAP?

Generally accepted accounting principles (GAAP)

What are the rules of financial accounting?

FINANCING Activities- transactions involving external sources of funding INVESTING Activities- transactions involving the purchase and sale of (1) long-term resources such as land, buildings, equipment, and machinery and (2) any resources not directly related to a company's normal operations OPERATING Activities- Transactions involving the primary operations of the company, such as providing products and services to customers and the associated costs of doing so, like utilities, taxes, advertising, wages, rent, and maintenance

What are the three business activities?