Chapter 1: Accounting in Business

Principles and Assumptions

Accounting __________ (and __________ ) are of two types; general principles and specific principles.

Income Statement

An __________ describes a company's revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities. Net Income = Revenues - Expenses

S Corporation

An __________, a corporation with special attributes, does not owe corporate income tax. Owners of these type of corporations report their share of corporate income with their personal income.

Accounting

An information and measurement system that identifies, records, and communicates relevant, reliable, and comparable information about an organization's business activities.

Conceptual Framework

The FASB and IASB are attempting to converge and enhance the __________ that guides standard setting. It includes objectives, qualitative characteristics, elements, and recognition and measurement.

Financial Accounting Standards Board (FASB)

The SEC has largely delegated the task of setting U.S. GAAP to the __________, which is a private-sector group that sets both broad and specific principles.

Sustainable Accounting Standards Board (SASB)

The __________ is a nonprofit entity engaged in creating and disseminating sustainability accounting standards for use by companies.

Business Activities

The accounting equation is derived from three major __________; financing, investing, and operating.

General Principles

The basic assumptions, concepts, and guidelines for preparing financial statements. They stem from long-used accounting principles.

Expanded Account Equation

The breakdown of equity yields the following __________: Assets = Liabilities + (Contributed Capital + Retained Earnings) and Assets = Liabilities + (Common Stock - Dividends + Revenues - Expenses)

Identify Ethical Concerns

The first guideline for ethical decision making. Use personal ethics to recognize an ethical concern.

Dividends

The outflow of resources such as cash and other assets to stockholders is called __________, which reduce equity. A part of retainer earnings.

Objectives

The peak component of the FASB framework which provide information useful to investors, creditors, and others.

Financial Statements

There are four basic __________ prepared from business transactions; income statement, statement of retained earnings, balance sheet, and statement of cash flows.

Company Operations

There are three basic types of __________; services, merchandising, and manufacturing.

Contributed Capital

More generally, __________ refers to the amount stockholders invest in the company.

Elements

A middle component of the FASB framework which define items that financial statements can contain.

Balance Sheet

A __________ describes a company's financial position (types and amounts of assets, liabilities, and equity) at a point in time. Assets = Liabilities + Equity

Statement of Retained Earnings

A __________ explains changes in equity from net income (or loss) and from any dividends over a period of time. Retained Earnings (End) = Retained Earnings (Start) + Net Income - Dividends

Statement of Cash Flows

A __________ identifies cash inflows (receipts) and cash outflows (payments) over a period of time. Cash Balance (End) = Cash Balance (Start) + Net Cash Flows (Operating) + Net Cash Flows (Investing) + Net Cash Flows (Financing)

Corporation (C Corporation)

A __________ is a business legally separate from its owner or owners, meaning it is responsible for its own acts and debts. Separate legal status means that it can conduct business with the rights, duties, and responsibilities of a person.

Sole Proprietorship (Proprietorship)

A __________ is a business owned by own person. The business is a separate entity for accounting purposes. However, the business is not a separate legal entity from its owner; maintains unlimited liability.

Net Loss

A __________ occurs when expense exceed revenues, which decreases equity.

Merchandising

A basic company operation that refers to buying products and reselling them for profit.

Manufacturing

A basic company operation that refers to creating products and selling them for profit.

Services

A basic company operation that refers to providing customer services for profit.

Financing

A business activity that refers to providing the means organizations use to pay for resources such as land, buildings, and equipment to carry out plans.

Investing

A business activity that refers to the acquiring and disposing of resources (assets) that an organization uses to acquire and sell its products or services.

Operating

A business activity that refers to using resources to research, develop, purchase, produce, distribute, and market products and services.

Account Form

A presentation of a balance sheet where assets are on the left and liabilities and equity are on the right.

Report Form

A presentation of a balance sheet where assets are on top, followed by liabilities and then equity at the bottom.

Ethics

Beliefs that distinguish right from wrong. They are accepted standards of good behavior.

U.S. SEC Registrants

Companies incorporated in the United States that issue their stock on U.S. exchanges.

Non-U.S. SEC Registrants

Companies incorporated under non-U.S. laws that issue their stock on U.S. exchanges.

Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank)

Congress passed the __________ to (1) promote accountability and transparency in the financial system, (2) put an end to the notion "too big to fail," (3) protect the taxpayer by ending bailouts, and (4) protect consumers from abusive financial services.

Sarbanes-Oxley Act (SOX)

Congress passed the __________, also called the SOX, to help curb financial abuses at companies that issue their stock to the public. It requires that these public companies apply both accounting oversight and stringent internal controls. The desired results include more transparency, accountability, and truthfulness in reporting transactions.

Expenses

Decrease equity (via net income) from costs of providing products and services to customers; examples are costs of employee time, use of supplies, advertising, utilities, and insurance fees. A part of retained earnings.

Specific Principles

Detailed rules used in reporting business transactions and events. They arise more often from rulings of authoritative groups.

External Transactions

Exchanges of value between two entities, which yield changes in the accounting equation. An example is the sale of a protection plan by an electronics company.

Internal Transactions

Exchanges within an entity, which may of may not affect the accounting equation. An example is a social media company's use of its supplies, which are reported as expenses when used.

Lenders (Creditors)

External users who loan money or other resources to an organization. Include banks, savings and loans, co-ops, and mortgage and finance companies. They look for information to help them assess whether an organization is likely to repay its loans with interest.

Suppliers

External users who use accounting information to judge the soundness of a customer before making sales on credit.

Voters, Legislators, and Government Officials

External users who use accounting information to monitor and evaluate government receipts and expenses.

Customers

External users who use financial reports to assess the staying power of potential suppliers.

Generally Accepted Accounting Principles (GAAP)

Financial accounting is governed by concepts and rules known as __________. They aim to make information relevant, reliable, and comparable.

Events

Happenings that affect the accounting equation and are reliably measured. They include business changes such as in the market value of certain assets and liabilities and natural changes such as floods and fires that destroy assets and create losses.

Return

If we invest money into an entity, __________ is expected. It is often linked to net imcome.

Securities and Exchange Commission (SEC)

In the United States, the __________, a government agency, has the legal authority to set GAAP. Also oversees the proper use of GAAP by companies that raise money from the public through issuances of their stock and debt.

Dun & Bradstreet's and The Risk Management Association

Industry averages are available from services such as __________ Industry Norms and Key Ratios and __________ Annual Statement Studies.

Relevant Information

Information that affects users decisions.

Comparable Information

Information that is helpful in contrasting organizations.

Reliable Information

Information that is trusted by users.

Production Managers

Internal users who depend on information to monitor costs and ensure quality.

Human Resource (HR) Managers

Internal users who need information about employees' payroll, benefits, performance, and compensation.

Research and Development (R&D) Managers

Internal users who need information about projected costs and revenues of any proposed changes in products and services.

Distribution Managers

Internal users who need reports for timely, accurate, and efficient delivery of products and services.

Shareholders (Stockholders)

Separate legal status also means that a corporation's owners, who are called __________, are not personally liable for corporate acts and debts.

Stockholders' Equity (Shareholders Equity)

Specifically, a corporation's equity—also called __________ — consists of four elements; common stock, dividends, revenues, and expenses.

Environmental, Social, and Governance (ESG)

Sustainability refers to __________ dimensions of a company.

Return On Assets (ROI)

__________ = Net Income/Average Total Assets It is a profitability measure useful in evaluating management, analyzing and forecasting profits, and planning activities.

Auditors

__________ also must verify the effectiveness of internal controls.

Conservatism and Industry Practices

__________ and __________ are also sometimes referred to as accounting constraints.

Risk

__________ is the uncertainty about the return we will earn.

Net Income

__________ occurs when revenue exceeds expenses. It increases equity.

Partnership

A __________ is a business owned by two or more people, called partners, which are jointly liable for tax and other obligations; at least three types of these businesses limit liability; LP, LLP, and LLC.

Legal Forms

A business can take one of three __________: proprietorship, partnership, or corporation.

Oppurtunity

A component of the fraud triangle that states a person must envision a way to commit fraud with a low perceived risk of getting caught. Employers can directly reduce this risk. An example of some control on __________ is a pre-employment background screening.

Pressure (Incentive)

A component of the fraud triangle that states a person must have some __________, or incentive, to commit fraud. Examples are unpaid bills and addictions.

Rationalization

A component of the fraud triangle that states a person who rationalizes fails to see the nature of the fraud or justifies the actions.

Double Taxation

A main disadvantage of a corporation is what's called __________—meaning that (1) the corporation income is taxed and (2) any distribution of income to its owners through dividends is taxed as a part of the owners' personal income, usually at the individual's income tax rate.

Qualitative Characteristics

A middle component of the FASB framework which require information that is relevant, reliable, and comparable.

Fraud Triangle

A model created by a criminologist that asserts the following three factors must exist for a person to commit fraud: opportunity, pressure, and rationalization.

Independence

A notable Dodd-Frank proposal is __________ for all members of the compensation committee (including additional disclosures); in the event of an accounting restatement, an entity must set policies mandating recovery ("clawback") of excessive incentive compensation.

Exemption

A notable Dodd-Frank proposal is __________ from Section 404(b) of SOX for smaller public entities from the requirement to obtain an external audit on effectiveness of internal control over financial reporting.

Whistleblower

A notable Dodd-Frank proposal which requires the SEC, when sanctions exceed $1 million, to pay a __________ between 10% and 30% of the sanction.

Language of Business

Accounting is called the __________ because all organizations set up an accounting information system to communicate data to help people make better decisions.

Convergence

Differences between U.S. GAAP and IFRS are decreasing as the FASB and IASB pursue a __________ processed aimed to achieve a single set of accounting standards for global use.

Shareholders (Investors)

External users who are owners of a corporation. They use accounting reports in deciding whether to buy, hold, or sell stock.

Directors

External users who are typically elected to a board of directors to oversee their interests in an organization. Since they are responsible to shareholders, their information needs are similar.

External (Independent) Auditors

External users who examine financial statements to verify that they are prepared according to generally accepted accounting principles.

Regulators

External users who have legal authority over certain activities of organizations (e.g., the Internal Revenue Service, utility boards, and securities regulators.

Contributors

External users who help nonprofit organizations use accounting information to evaluate the use and impact of their donations.

Purchasing Managers

Internal users who need to know what, when, and how much to purchase.

Service Managers

Internal users who require information on the costs and benefits of looking after products and services.

Marketing Managers

Internal users who use reports about sales and costs to target consumers, set prices, and monitor consumer needs, tastes, and price concerns.

Shares (Stock)

Ownership of all corporations is divided into units called __________.

Internal Controls

Procedures set up to protect company property and equipment, ensure reliable accounting reports, promote efficiency, and encourage adherence to company policies. Examples are good records, physical controls (locks, passwords, guards), and independent reviews.

Accounting Principles

Refers to the group of at least four basic principles; measurement, revenue recognition, expense recognition, and full disclosure.

Accounting Assumptions

Refers to the group of four basic assumptions: going-concern, monetary unit, time period, and business entity.

Assets

Resources a company owns or controls. These resources are expected to yield future results. Examples are cash, supplies, equipment, and land, where each carries expected benefits.

Revenue Recognition Principle

Revenue (sales) is the amount received from selling products and services. The __________ provides guidance on when a company must recognize (record) revenue. A key to modern accounting.

Business Entity Assumption

The __________ means that a business is accounted for separately from other business entities, including its owner. The reason for this assumption is that separate information about each business is necessary for good decisions.

Going Concern Assumption

The __________ means that accounting information reflects a presumption that the business will continue operating instead of being closed or sold.

Monetary Unit Assumption

The __________ means that we can express transactions and events in monetary, or money, units. Money is the common denominator of business.

Full Disclosure Principle

The __________ prescribes that a company report the details behind financial statements that would impact user's decisions. Those disclosures are often in footnotes to the statements.

Materiality Constraint

The __________ prescribes that only information that would influence the decisions of a reasonable person need be disclosed. This constraint looks at both the importance and relative size if an amount.

Cost-Benefit Constraint

The __________ prescribes that only information with benefits of disclosure greater than the costs of providing it need be disclosed.

Time Period Assumption

The __________ presumes that the life of a company can be divided into time periods, such as months and years, and that useful reports can be prepared for those periods.

Measurement Principle (Cost Principle)

The __________, also called the cost principle, usually prescribes that accounting information is based on actual cost (with a potential for subsequent adjustments to market).

Expense Recognition Principle (Matching Principle)

The __________, also called the matching principle, prescribes that a company record the expenses it incurred to generate the revenue reported. A key to modern accounting.

International Accounting Standards Board (IASB) and International Financial Reporting Standards (IFRS)

The __________, an independent group (consisting of individuals from many countries) issues __________ that identify preferred accounting practices.

Financial Accounting

The area of accounting aimed at serving external users by providing them with general-purpose financial statements.

Managerial Accounting

The area of accounting that serves the decision making needs of internal users.

Recognition and Measurement

The base component of the FASB framework which set criteria that an item must meet for it to be recognized as an element; and how to measure each element.

Private Accounting

The majority of accounting opportunities are in __________, which are employees working for businesses.

Recordkeeping (Bookkeeping)

The recording of transactions and events, either manually or electronically.

Accounting Equation

The relation of assets, liabilities, and equity is reflected in the __________: Assets = Liabilities + Equity

Analyze Options

The second guideline in ethical decision making. Consider all good and bad consequences.

General-Purpose

The term __________ refers to the broad range of purposes for which external users rely on these statements.

Make Ethical Decisions

The third guideline in ethical decision making. Choose the best option after weighing all consequence.

Guidelines For Ethical Decision Making

The three __________ include identifying ethical concerns, analyzing options, and making ethical decisions.

Accounting Constraints

There are two basic __________ on financial reporting; materiality and cost-benefit.

Governance Systems

To reduce the risk of accounting fraud, companies set up __________. Includes a companies owners, managers, employees, board of directors, and other important stakeholders, who work together to reduce the risk of accounting fraud and increase confidence in accounting reports.

Internal Users

Users of accounting information who are directly involved in managing and operating and organization; includes the CEO, the CFO, the chief audit executive (CAE), et. al. They use the information to help improve the efficiency and effectiveness of an organization.

External Users

Users of accounting information who are not directly involved in running the organization. They include shareholders (investors), lenders, directors, et. al. Yet their business decisions depend on information that is reliable, relevant, and comparable.

Liabilities

What a company owes its nonowners (creditors) in future payments, products, or services. Examples are wages payable to workers, accounts payable to suppliers, notes payable to banks, and taxes payable to the government.

Common Stock (Capital Stock)

When a corporation issues only one class of stock, we call it __________.

Nonexecutive Employees and Labor Unions

__________ and __________ are external users who use financial statements to judge the fairness of wages, assess job prospects, and bargain for better wages.

Recording

__________ business activities requires that we keep a chronological log of transactions and events measured in dollars.

Communicating

__________ business activities requires that we prepare accounting reports such as financial statements, which we analyze and interpret.

Identifying

__________ business activities requires that we select relevant transactions and events. Examples are the sale of iPhones by Apple and the receipt of ticket money by TicketMaster.

Revenues

__________ increase equity (via net income) from sales of products and services to customers; examples are sales, of products, consulting services provided, facilities rented to others, and commissions from services. A part of retained earnings.

Retained Earnings

__________ is the accumulated revenues less the accumulated expenses and dividends since the company began.

Equity

__________ is the owner's claim on assets, and is equal to assets minus liabilities. Also called net assets. Increases from owner investments (stock issuances) and revenues. Decreases from dividends and expenses.

Common Stock

__________, which is part of contributed capital, reflects inflows of resources such as cash and other net assets from stockholders in exchange for stock.