Chapter 1 - Introduction to Financial Accounting

Accounting Equation

Assets = Liabilities + Equity

Public Company Accounting

Board established by Sarbanes-Oxley Act to approve auditing standards and monitor the quality of financial statements and audits

Return on Equity Equation

Net Income / Average Stockholders' Equity

Debt-to-Equity Equation

Total liabilities / Total Stockholders' Equity

Profitability

ability of a company to generate net income

Solvency

ability of a company to meet obligations, mainly to creditors

Disclosure

act of providing financial and nonfinancial information to external users

Sarbanes Oxley Act

act passed in 2002 which requires a company's CEO and CFO to personally sign a statement attesting to the accuracy of financial statements

Corporation

business organization that is a separate legal entity from its owners; characterized by a large number of owners who own shares of equity and who are not involved in managing day-to-day operations of the company

Representational Faithfulness

characteristic of accounting information refering to the degree with which is reclects the underlying economic events it purports to measure

Verifiability

characteristic of accounting information referring to the ability of an independent auditor to reproduce the accounting information by examining the underlying economic events and transactions

Predictive Value

characteristic of information referring to its ability to increase the accuracy of a forecast

Feedback Value

characteristic of information that enables users to confirm or correct prior expectations

Neutrality

characteristic of information that is free from any bias

Timeliness

characteristic of information that is received by decision makers before it loses its capacity to influence decisions

Debt-to-Equity Ratio

common measure of financial leverage = total liabilities divided by stockholder's equity

Securities Exchange Commission

created by the 1934 Securities Act to regulate the issuance and trading of securities

Retained Earnings

earned capital, the cumulative net income and loss, of the company that has not been paid to shareholders as dividends

Cost of goods sold

expense reflecting the cost of merchandise or manufactured products sold to customers

Balance Sheet

financial report based on the accounting equatiion that lists a company's assets, liabilities, and equity at a given point in time

Income Statement

financial report on operating activities that lists revenues less expenses OVER A PERIOD OF TIME, yielding a company's net income

Statement of Cash Flows

financial report that identifies net cash flows into and out of a company from operating, investing, and financing activities over a period of time

Statement of Stockholders Equity

financial statement that reports on changes in key equity accouns over a period of time

Audited

financial statements are reviewed by an independent party

Sole Proprietorship

form of business characterized by a single owner who typically manages the daily operations

Partnership

form of business entity characterized by two or more owners who are also usually involved in managing the business

Board of Directors

governing body of a corporation elected by the shareholders

Conceptual Framework

guidelines developed by FASB to provide structure for considering future standards, as well as to guide accountants in areas where standards do not exist

Revenue

increase in equity resulting from the sale of goods and services to customers

Economic Consequences

issues resulting from accounting changes

Investing Activities

methods companies use to acquire and dispose of assets in the course of production and sales

Financing Activities

methods companies use to fund investment resources

Operating Activities

methods companies use to produce, promote, and sell its products and services

Expense

outflow or use of assets, including costs of products and services sold, operating costs, and interest on debt, to generate revenue

Stockholders

owners of a corporation

Internal Controls

policies and procedures used to protect assets, ensure reliable accounting, promote efficient operations, and urge adherence to company policies

Liabilities

probable future economic sacrifice resulting from a past or current event

Managerial Accounting

process of accounting designed for decision makers WITHIN the company

Planning Activities

process of identifying a company's goals, and the strategies adopted to reach those goals

Accounting

process of identifying, measuring, and communicating financial information to help people make economic decisions

Financial Accounting

process of recording, summarizing, and analyzing financial transactions designed primarily for decision makers OUTSIDE of the company

American Institute of Certified Public Accountaints (AICPA)

professional organization of CPAs in the USA

Suppliers

providers of merchandise for resale or materials needed for operating activities

Income

revenue minus expenses; it is also the increase in net assets resulting from the company's operations

Assets

resource owned by the company that is expected to provide the company future economic benefits

Generally Accepted Accounting Principles (GAAP)

set of standards and procedures accountants have developed that apply to the prepartion of financial statements

Financial Accounting Standards Board (FASB)

standard-setting organization which publishes accounting standards governing the preparation of financial reports

Return on Equity

the ultimate measure of performance from the shareholders perspective, computed as net income divided by average equity

Creditors

those to whom a company owes money; the people who provide debt financing

Risk

uncertainty of expected return