Chapter 1: Fundamental Financial Accounting Concepts

Temporary Accounts

Since the Revenue, Expense, and Dividend accounts are closed each period, they are called ________ _______.

Service Businesses

These businesses includes doctors, attorneys, accountants, dry cleaners, and housekeepers, provide services to their customers.

Manufacturing Businesses

These businesses make the goods that they sell to their customers.

Merchandising Businesses

These businesses, sometimes called retail or wholesale companies, sell goods to customers that other entities make.

Asset Source Transaction

This type of transaction increases the business's assets (cash) and its stockholders' equity (common stock).

Asset Exchange Transaction

This type of transaction reduces the asset account Cash and increases the asset account Land. The amount of total assets is not affected. It simply reflects changes in the composition of assets.

Accounting Period

Time span covered by the financial statements; normally one year, but may be a quarter, a month or some other time interval.

Annual Report

Organizations normally provide information, including financial statements, to stakeholders yearly in a document known as an _______ _______.

Not-for-profit entities

Organizations that are not motivated by profit.

Stakeholders

Parties interested in the operations of a business, including owners, lenders, employees, suppliers, customers, and government agencies.

International Accounting Standards Board

Private, independent body that establishes International Financial Reporting Standards (IFRS).

Liquidation

Process of dividing up an organization's assets and returning them to the resource providers. Creditors normally have first priority; after creditor claims have been satisfied, any remaining assets are distributed to the company's owners (investors).

International Financial Reporting Standards (IFRS)

Pronouncement established by the International Accounting Standards Board that provide guidance for the preparation of financial statements.

Investors

Provide financial resources in exchange for ownership interests in businesses. Owners expect businesses to return to them a share of the business including a portion of earned income.

Accounts

Record of classified and summarized transaction data; component of financial statement elements.

Revenue

Represents an economic benefit a company obtains by providing customers with goods and services.

Historical Cost Concept

Requires that most assets be reported at the amount paid for them (their historical cost) regardless of increases in market value.

Generally Accepted Accounting Principles

Rules and practices that accountants agree to follow in financial reports prepared for public distribution.

Asset Use Transactions

Decrease the total amount of assets and the total amount of claims on assets (liabilities or stockholders' equity.

Assets

Economic resource used to produce revenue which is expected to provide future benefit to the business.

Interest

Fee paid for the use of funds; represents expense to the borrower and revenue to the lender.

Income Statement

Financial reporting of profitability; measures the difference between revenues and expenses for the accounting period (whether or not cash has been exchanged).

Balance Sheet

Financial statement that reports a company's assets and the corresponding claims (liabilities and equity) on those assets as of a specific date (usually as of the end of the accounting period).

Financing Activities

include obtaining cash (inflow) from owners or paying cash (outflow) to owners (dividends).

Going Concern

A company must properly manage its assets as well as its liablitlies and stockholders' equity in order to remain a ______ _______. The ______ _______ doctrine assumes that a business is able to continue its operations into the foreseeable future.

Market

A group of people or entities organized to exchange items of value.

Transaction

A particular kind of event that involves transfering something of value between two entities. Examples: Acquiring assets from owners, borrowing money from creditors, and purchasing or selling goods or services.

Financial Accounting Standards Board

A privately funded organization with the primary authority for establishing accounting standards in the United States.

Matching Concept

Accounting principle of recognizing expenses in the same accounting period as the revenues they produce, using one of three methods; match expenses directly with revenues (e.g. cost of goods sold); match expenses to the period in which they are incurred (e.g. rent expense), and match expenses systematically with revenues (e.g. depreciation expense).

Retained Earnings

Accumulated undistributed earnings of a company retained for future needs or for future distribution to its owners.

Double-entry bookkeeping

All transactions affect the accounting equation in at least two places. It is from this practice that the ______-______ _______ system derives its name.

Accounting Event

An economic occurence that changes an enterprise's assets, liabilities, or stockholders' equity.

Expense

An economic sacrifice (decrease in assets or increase in liabilities) that is incurred in the process of generating revenue.

Accounting

An information system that reports on the economic activities and financial condition of a business or other organization.

Claims

As a result of providing assets to a business the creditors and investors are entitled to make potential _____ on the assets owned by the business.

The Accounting Equation

Assets = Liabilities + Owner's Equity?

liquidity

Assets are displayed in the balance sheet based on their level of _______. This means that assets are listed in the order of how rapidly they can be converted into cash.

Closing

At the end of the accounting period the data in these accounts are transferred to the Retained Earnings account. The process of transferring the balances is called _____.

Permanent Account

Balance sheet accounts; contain information carried forward from one accounting period to the next (ending account balance one period becomes beginning account balance next period).

Common Stock

Basic class of corporate stock that has no preferential claim on assets or dividends; certificates that evidence ownership in a company.

Labor Resources

Both intellectual and physical efforts of individuals used in the process of providing goods and services to customers.

Financial Accounting

Branch of accounting focused on the business information needs of external users (creditors, investors, governmental agencies, financial analysts, etc.); its objectives is to classify and record business events and transactions to produce external financial reports (income statement, balance sheet, statement of cash flows, and statement of changes in equity).

Financial Statements

Business communicates through four _______ _______: Income Statements, Statement of Changes in Equity, a Balance Sheet, and a statement of cash flow.

Reporting Entities

Businesses or other organizations for which financial statements are prepared.

articulation

Characteristic of financial statements that means they are interrelated. For example, the amount of net income reported on the income statement is added to beginning retained earnings as a component in calculating the ending retained earnings balance reported on the statement of changes in stockholders' equity.

Horizontal Statements Model

Concurrent representation of several financial statements horizontally across a page.

Statement of Cash Flows

Explains how a company obtained and used cash during the accounting period.

Dividend

If a business transfers some or all of its earned assets to owners, the transfer is frequently called a ______.

Net Loss

If expenses are greater than revenues, the difference is called ___ ____.

Stockholders

In accounting terms investors are called ______.

Net income

Increase in equity resulting from operating the business.

Income

Increase in value created by providing goods and services through resource transformation.

Users

Individuals or organizations that use financial information for decision making.

Investing Activities

Involve paying cash (outflow) to purchase long-term assets or receiving cash (inflow) from selling long-term assets.

Operating Activities

Involve receiving cash (inflow) from revenue and paying cash (outflow) for expenses.

Creditors

Lend financial resources to businesses. Instead of a share of the business, _____ expect the businesses to repay borrowed resources plus a specified fee called interest.

Financial Resources

Money or credit supplied to a business by investors (owners) or creditors.

Physical Resources

Natural resources businesses transform to create more valuable resources.

Statement of Changes in Stockholders' Equity

Statement that summarizes the transactions that affected the owners' equity during the accounting period.

Managerial Accounting

The accounting information needed by internal users, stakeholders, such as managers, and employees who work within a business is provided by _________ _________

Stockholders' Equity

The business' commitment to the stockholders is called __________ ________.

Earnings (net income)

The difference between revenues and expenses. Sometimes called "profit".

Elements

The information reported in financial statements is organized into ten categories known as _______.

Liabilities

The obligations a business has to its creditors.

General Ledger

The set of all accounts used in a given accounting system, typically organized in financial statement order.

Profit

Value added by transforming resources into products or services desired by customers.