Accounting-Chapter 1

Forensic Accounting

A branch of accounting that involves investigations that result from actual or anticipated disputes such as criminal activity.

Conceptual Framework

A cohesive set of interrelated objectives, elements, and recognition and measurement criteria for the GAAP developed by the FASB.

Financial Statement Elements

A component of the conceptual framework that identifies the significant components--assets, liabilities, stockholders' equity, revenues, and expenses--used to prepare financial statements.

Financial Reporting Objectives

A component of the conceptual framework which specifies that financial statements should provide information that is (1) useful for investment and credit decision, (2) helpful in assessing an entity's ability to generate future cash flows, and (3) about an entity's resources, claims on those resources, and the effects of events causing changes in these items.

Period-In-Time Statement

A financial statement accumulating information for a specific period of time; examples include the income statement, the statement of stockholders' equity, the statement of retained earnings, and the statement of cash flows.

Point-In-Time Statement

A financial statement presenting information as of a particular date; the balance sheet is a point-in-time statement.

Statement of Stockholders' Equity

A financial statement presenting information regarding the events that cause a change in stockholders' equity during a period. The statement presents the beginning balance, additions to, deductions from, and the ending balance of stockholders' equity for the period.

Income Statement

A financial statement reporting a business's sales revenue and expenses for a given period of time.

Balance Sheet

A financial statement showing a business's assets, liabilities, and stockholders' equity as of a specific date.

Statement of Cash Flows

A financial statement showing a firm's cash inflows and cash outflows for a specific period, classified into operating, investing, and financing activity categories.

Sole Proprietorship

A form of business organization in which one person owns the business.

Triple Bottom Line

A form of reporting that captures an expanded set of measures in addition to traditional financial reporting. The three bottom lines include economic, ecological, and social.

Corporation

A legal entity created under the laws of a state or the federal government. The owners of a corporation receive shares of stock as evidence of their ownership interest in the company.

New York Stock Exchange (NYSE)

A marketplace, located in New York City, for the buying and selling of corporate shares.

Financial Accounting Standards Board (FASB)

A private, not-for-profit organization whose task is to develop generally accepted accounting principles in the United States.

Certified Public Accountant (CPA)

A professional designation given to an accountant who has fulfilled stringent licensing requirements.

Relevance

A qualitative characteristic of accounting information; relevant information contributes to the predictive and evaluative decisions made by financial statement users.

Public Company Accounting Oversight Board (PCAOB)

A quasi-governmental agency established by the Sarbanes-Oxley Act to overhaul auditing standards, inspect the work of accounting firms, and discipline independent auditors that fail to meet and maintain acceptable standards of audit performance.

Annual Report

A report filed with the U.S. Securities and Exchange Commission by publicly held companies that reports the financial position and operating performance of the company. A less detailed version is mailed to the company's stockholders.

Financing Activities

A section in the statement of cash flows associated with obtaining cash from owners and creditors, returning cash to owners, and repaying amounts borrowed.

Operating Activities

A section in the statement of cash flows that reports cash flows from all activities that are not classified as investing or financing activities.

Investing Activities

A section in the statement of cash flows that reports cash flows involving (1) the purchase and sale of plant assets and intangible assets, (2) the purchase and sale of stocks, bonds, and other securities (other than cash equivalents), and (3) the lending and subsequent collection of money.

Sarbanes-Oxley Act (SOX)

A set of legislative rules enacted in 2002 to provide stricter guidance over corporate behavior. The legislation was a reaction of the infamous accounting scandals at Enron and WorldCom.

Generally Accepted Accounting Principles (GAAP)

A set of standards and procedures that guide the preparation of financial statements.

Equity Financing

A source of financing for a company involving the sale of shares of common stock.

Debt Financing

A source of financing for a company involving the use of debt, such as a bank loan or the issuance of bonds.

Partnership

A voluntary association of two or more persons for the purpose of conducting a business.

Cash Basis of Accounting

Accounting procedures whereby sales revenue is recorded when cash is received from operating activities and expenses are recorded when cash payments related to operating activities are made.

Accrual Basis of Accounting

Accounting procedures whereby sales revenue is recorded when earned and realized and expenses are recorded in the period in which they help to generate the sales revenue.

Monetary Unit Concept

An accounting guideline that reports assets, liabilities, and stockholders' equity in the basic unit of money.

Materiality

An accounting guideline that states that insignificant data that would not affect a financial statement user's decisions may be recorded in the most expedient manner.

Expense Recognition Principle

An accounting guideline that states that net income is determined by relating expenses to the sales revenues generated by the expenses.

Revenue Recognition Principle

An accounting principle requiring that sales revenues be recognized when services are performed or goods are sold.

Consistency

An accounting principle stating that accounting reports should be prepared on a basis consistent with the prior periods.

Cost Principle

An accounting principle stating that asset measures should be based on the price paid to acquire an asset.

Full Disclosure Principle

An accounting principle stipulating that all facts necessary to make financial statements useful should be disclosed in a firm's annual report.

Going Concern Concept

An accounting principle that assumes that, in the absence of evidence to the contrary, a business enterprise will have an indefinite life.

Ethics

An area of inquiry dealing with the values, rules, and justifications that govern an individual's way of life or a corporation's behavior.

Accounting Entity

An economic unit with identifiable boundaries that is the focus for the accumulation and reporting of financial information.

Accounting Equation

An expression of the equivalency of the economic resources and the claims upon those resources of a business, often stated as Assets = Liabilities + Stockholders' Equity.

International Accounting Standards Board (IASB)

An independent accounting standard-setting agency whose purpose is to develop international financial accounting standards.

Creditor

An individual or financial institution that lends money or services to a company with the expectation of receiving repayment in the future.

International Financial Reporting Standards (IFRS)

An international set of accounting standards, interpretations, and the framework for the preparation and presentation of financial statements used in many countries.

Stockholder

An owner of a corporation as a result of the purchase of the corporation's shares of stock; also known as a shareholder.

Principal

As it relates to debt financing, the amount initially borrowed from the creditor.

Earned Capital

Capital that is earned by a company and not distributed to its stockholders as a dividend; referred to as retained earnings.

Expenses

Decreases in stockholders' equity incurred by a firm during the process of generating its sales revenues.

Verifiability

Different individuals can independently reach a consensus that the reported amounts represent a faithful representation.

Understandability

Enhanced if information is classified, characterized, and presented clearly and concisely.

American Institute of Certified Public Accountants (AICPA)

Has a professional code of ethics to guide the conduct of its member CPAs.

U.S. Securities and Exchange Commission (SEC)

Has been instrumental in the development of generally accepted accounting principles in the United States.

Institute of Management Accountants

Has written standards of ethical conduct for accountants employed in the private sector.

Timeliness

Having information available in time to be capable of influencing a decision.

Sales Revenue

Increases in stockholders' equity that result when a firm provides goods or services to its customers.

Management Discussion and Analysis (MD&A)

Part of the annual report that contains management's interpretation of the company's recent past performance along with discussion of possible future opportunities and risks.

Cost-Benefit Constraint

Requires that the benefits derived from accounting information are greater than the cost of providing the information.

Managerial Accounting

The accounting activities carried out by a firm's accounting staff primarily to provide management with accounting data for decisions related to a firm's operations.

Notes to the Financial Statements

The annual report section following the four financial statements that includes a description of the assumptions and estimates that were used in preparing the statements, the measurement procedures that were followed, and the details behind the summary numbers.

Financial Accounting

The area of accounting dealing with the preparation of financial statements showing a business's results of operations, financial position, and cash flow.

Contributed Capital

The capital contributed to a company by stockholders when they purchase shares of stock from the company.

Qualitative Characteristics of Accounting Information

The characteristics of accounting information that contribute to decision usefulness; the primary qualities are relevance and faithful representation.

Recognition and Measurement Criteria

The criteria that must be met before a financial statement element may be recorded in the accounts. Essentially, the item must meet the definition of an element and must be measureable, and the resultant information about the item must be relevant and reliable.

Net Assets

The difference between a business's assets and liabilities. Net assets are equal to stockholders' equity.

Retained Earnings

The earnings of a corporation that have been retained in the corporation (have not been paid out as a dividend) for future corporate use.

Assets

The economic resources of a business that can be expressed in money terms.

Net Income

The excess of a business's sales revenues over its expenses.

Faithful Representation

The fundamental qualitative characteristics that requires a depiction to be complete, neutral, and free from error such that it depicts the phenomena it purports to represent.

Liabilities

The obligations or debts that a business must pay in money or services at some time in the future as a consequence of past transactions or events.

Accounting

The process of measuring the economic activity of a business in money terms and communicating those financial results to interested parties. The purpose of accounting is to provide financial information that is useful in economic decision making.

Comparability

The qualitative characteristic that enables users to determine similarities and differences among items.

10-K

The report filed annually with the U.S. Securities and Exchange Commission by publicly held companies that reports the financial position and operating performance of the company.

Auditor's Report

The report of the independent auditor that describes the activities undertaken by a company's outside auditor and reports the auditor's opinion regarding whether the financial statements fairly present the results of the company's operations and financial health.

Stockholders' Equity

The residual interest in the assets of a business after all liabilities have been paid off; stockholders' equity is equal to a firm's net assets, or total assets less total liabilities.

Accounting Period

The time period, usually one year, to which periodic accounting reports are related; also known as the fiscal period.

Net Loss

When total expenses exceed sales revenue.