CH. 1
Review: State the basic accounting equation and define its components
Assets = L + S.H.E.
Basic Accounting Equation
Assets = Liabilities + Stockholder's Equity
Review: explain the building blocks of accounting: ethics, principles, & assumptions
Ethics: SOX Principles: historical cost, fair value Assumptions: Monetary Unit, Economic Entity
T/F Dividends are expenses
False. They reduce retained earnings, which is part of Stockholder's equity.
FASB
Financial Accounting Standards Board; private organization that establishes Generally Accepted Accounting Principles (GAAP) in the US
GAAP
Generally Accepted Accounting Principles; established by FASB; Common standards that indicate how to report economic events
Internal users
Managers who plan, organize & run a business
Management Consulting
Ranges from installing basic acc software or highly complex enterprise resource planning systems, to support services.
Assets
Resources a business owns (characteristic: the capacity to provide future services or benefits)
Recording Consists of...
a systematic, chronological diary of events
Economic Entity Assumption
can be any organization or unit in society.
Heading on an income statement
company, type of statement, & the time period covered by the statement
Retained Earnings
determined by 3 items: Revenues, Expenses, Dividends
Internal Transactions
economic events that occur entirely within one company
Private Accounting
employee of a for-profit company.
Revenues
gross increases in stockholder's equity resulting from business activities entered into for the purpose of earning income
Three Basic Accounting Activities
identifies, records, & communicates
External users
individuals & organizations outside a company who want financial info about the company (investors or creditors)
Sarbanes-Oxley Act (SOX)
intent to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals.
Bookkeeping
involves only the recording of economic events
Governmental Accounting
irs
Taxation
major area of public accounting. Tax advice, planning, preparing tax returns, representing clients before IRS
Faithful Representation
means that the #'s & descriptions match what really existed or happened- factual
Public Accounting
offer expert services to the general public. A major portion involved auditing (CPA examines company financial statements and provides opinions)
Income Statement
presents the revenues & expenses & resulting net income/net loss for a specific period of time
Balance Sheet
reports the assets, liabilities, & stockholders' equity of a company at a specific date
Net Income
shown on income statement; When revenue exceeds expenses
Fair Value Principle
states that the assets and liabilities should be reported at fair value
Retained Earnings Statement
summarizes the changes in retained earnings for a specific period of time
Stockholders Equity
the ownership claim on a corporation's total assets. (assets - liability)
Common Stock
the total amount paid in by stockholders for the shares they purchase
T/F A business owner's personal expenses must be separated from expenses of the business to comply with accounting's economic entity assumption.
true.
Forensic Accounting
using acc to investigate theft & fraud
Review: Identify the activities and users associated with accounting
1) Identify, record, communicate. 2) Internal Users & External Users.
Five things Statement of Cash Flows reports
1) cash effects of a company's operations during a period 2) investing activities 3) financing activities 4) net increase or decrease in cash during the period 5) cash amount at the end of the period
T/F The two most common types of external users are investors & company officers
False. 2 most common are investors & creditors.
Accounting
(info system) the entire process of identifying, recording & communicating economic events of a company to interested users
Review: analyze the effects of business transactions on the accounting equation
---
Each Transaction must be analyzed in terms of it's effect on: (2 things)
1) 3 components of basic acc equation 2) specific types of items within each component
Partnership
Business owned by 2+ people. For acc purposes the partnership transactions must be kept separate from personal activities of the partners.
Liabilities
Claims against assets- that is, existing debts and obligations
Proprietorship
Owner is the manager/operator, small. Owner receives any profits, suffers any losses, and is personally liable for all debts of the business.
SEC
Securities & Exchange Commission
What is Stockholders Equity broken down into? (2 things). What is Retained Earnings broken down into? (3 things).
Stockholders Equity is broken down into Common Stock & Retained Earnings. Retained Earnings is broken down into Revenues, Expenses, & Dividends.
T/F Common Stock & Retained Earnings columns indicate the cause's of each change in the stockholder's claim on assets.
True.
T/F Congress passed the SOX to reduce unethical behavior and decrease the likelihood of future corp. scandal
True.
T/F Income statement lists revenues first, followed by expenses.
True.
T/F Managerial acc activities focus on reports for internal users
True.
T/F The 3 steps in acc process are identification, recording, & communication
True.
T/F The primary accounting standard-setting body in the US is the FASB (financial accounting standards board)
True.
T/F The two sides of the equation must always be equal
True.
Expenses
cost of assets consumed or services used in the process of earning revenue (they are decreases in stockholders equity that result from business operation)
Historical Cost Principle
dictates that companies record assets at their cost. If cost changes a year later the original cost is what you report the cost as.
Dividends
distribution of cash or other assets to stockholders (not an expense)
External Transactions
economic events between the company & some outside enterprise.
Relevance
means that financial info is capable of making a difference in a decision
Monetary Unit Assumption
requires that companies include in the accounting records only transaction data that can be expressed in money terms.
Net Loss
shown on income statement; when expenses exceed revenue
Statement of Cash Flow
summarizes the info about the cash inflows (receipts) & outflows (payments) for a specific period of time
Corporation
Limited liability by stockholders. They may transfer all/part of ownership to others- corp. have unlimited life.
T/F Balance Sheet lists liabilities at the top, followed by assets and stockholders' equity
False. Balance Sheet lists assets at the top, followed by liabilities and stockholders' equity
T/F Bookkeeping encompasses all steps in the accounting process
False. Bookkeeping only involves the recording step.
T/F relevance means that financial info matches what really happened; the info is factual.
False. Faithful representation mean that it is factual, what really happened.
T/F The historical cost principle dictates that companies record assets at their cost. In later periods, however, the fair value of the asset must be used if fair value is higher than its cost.
False, Historical cost principle dictates that companies record assets at their cost, and that cost is to be used in later periods.
T/F Accountants prepare, but do not interpret financial reports
False. Accountants analyze and interpret info in reports as part of the communication step
Review: describe the 4 financial statements & how they are prepared
Income Statement, Retained Earnings Statement, Balance Sheet, Statement of Cash Flows
IASB
International Accounting Standards Board; acc standard-setting body that issues standards adopted by many countries outside of the US
IFRS
International Finance Reporting Standards; International standards set by IASB