Chapter 1

Accounting Equation

Assets=Liabilities+Owner's Equity The two sides of the equation must always be equal, or "in balance". To evaluate the financial effects of business activities, it is important to understand their effects on this equation.

International Accounting Standards Board (IASB)

The IASB has approved more than 40 international financial reporting standards (IFRS)

Public Company Accounting Oversight Board (PCAOB)

a governmental body created by the Sarbanes-Oaxley Act, regulates the accounting profession and has wide powers to determine the standards that auditors must follow and to discipline them if they do not.

Money Measure

all business transaction are recorded in terms of money. Of course, non financial information may also be recorded, but it is through the recording of monetary amounts that a business's transaction and activities are measured. Money is the only factor common to all business transactions, and thus it is the only unit of measure capable of producing financial data that can be compared.

Institute of Management Accountants (IMA)

also has a code of professional conduct. It emphasizes that management accountant have a responsibility to be competent in their jobs, to keep information confidential except when authorized or legally required to disclose it, to maintain integrity and avoid conflicts of interest, and to commented information objectively and without bias.

Business

an economic unit that aims to sell goods and services to customers at prices that will provide an adequate return to its owners.

Liabilities

are a business's present obligations to pay cash, transfer assets, or provide services to other entities in the future. Among these obligations are accounts owned to suppliers for goods or services bought on credit (called accounts payable), borrowed money (e.g., money owed to bank loans), salaries and waged owed to employees taxes owed to the government, and services to be performed.

Business Transactions

are economic events that affect a business's financial position. Businesses can have hundreds or even thousands of transaction every day. These transactions are the raw material of accounting reports.

Assets

are the economic resources of a company that are expected to benefit the company's future operations. Certain kinds of assets--for example, cash and money that customers owe to the company (called accounts receivable)--are monetary items. Other assets--inventories (goods heads for sale), land, buildings, and equipments--are non-monetary, physical items. Still other assets--the rights granted by patents, trademarks and copyrights--are nonphysical.

Revenues and Expenses

are the increases and decreases in owner's equity that result from operating a business.

Internal Revenue Service (IRS)

because a major source of the government's revenue is the income tax the tax laws specify the rules for determining taxable income. The IRS interprets and enforces these rules. In some cases, the rules conflict with good accounting.

Certified Public Accountant (CPA)

because financial statement are prepared by management and could be falsified for personal gain, all companies that sell shares of their stock to the public and many companies that apply for sizable loans have their financial statements audited by an independent CPA.

Management Information System (MIS)

consists of the interconnected subsystems that provide the information needed to run a business. The accounting information system is the most important subsystem because it plays the key role of managing the flow of economic data to all parts of a business and to interested parties outside the business.

Separate Entity

for accounting purposes, a business is a separate entity, distinct not only from its creditors and customers but also from its owners. It should have its own set of financial records, and its records and reports should refer only to its own affairs.

International Financial Reporting Standards (IFRS)

foreign companies may use these standards in the US rather than having to convert their statements to U.S. GAAP as called for by the FASB standards

Financial Accounting

generates reports and communication them to external decision makers so they can evaluate how well the business has achieved its goals

Sarbanes-Oaxley Act

in 2002, Congress passed this to regulate financial reporting and the accounting profession, among other things. This legislation ordered the Securities and Exchange Commission (SEC) to draw up rules requiring the chief executives and chief financial officers of all publicly traded U.S. companies to swear that, based on their knowledge, the quarterly statements and annual reports that their companies file with the SEC are accurate and complete.

Operating Activities

includes selling goods and services to customers, employing managers and workers, buying and producing goods and services, and paying taxes

Performance Measures

indicates whether managers are achieving their business goals and whether the business activities are well managed

Financing Activities

involve obtaining adequate funds, or capital, to begin operations and to continue operating. These activities include obtaining capital from creditors, such as banks and suppliers, and form owners. They also include repaying creditors and paying a return to the owners.

Investing Activities

involve spending the capital a company receives in productive ways that will help it achieve its objectives, These activities include buying land, buildings, equipment, and other resources that are needed to operate the business and selling them when they are no longer needed.

Sole Proprietorship

is a business owned by one person. The owner takes all the profits or losses of the business and is liable for all its obligations. Sole proprietorships represent the largest number of businesses in the US, but typically they are the smallest in size.

Corporation

is a business unit chartered by the state and legally separate from its owners (the stockholders). The stockholders, whose ownership is represented by shares of stock, do not directly control the corporations's operations.

Ethics

is a code of conduct that applies to everyday life. It addresses the question of whether actions are right or wrong.

Securities and Exchange Commissions (SEC)

is an agency of the federal government that has the legal power to set and enforce accounting practices for companies who securities are offered for sale to the general public. As such, it has enormous influence on accounting practice.

Audit

is an examination of a company's financial statements and the accounting systems, controls, and records that produced them. The purpose of the audit is to ascertain that the financial statements have been prepared in accordance with generally accepted accounting principles.

Accounting

is an information system that measure, processes, and communicates financial information about an economic entity. An economic entity is a unit that exists independently, such as a business, a hospital, or a governmental body. Accounting measures business activities by recording data about them for future use. The data are stored until needed and then processed to become useful information. The information is communicated through reports to decision makers.

Partnership

is like a sole proprietorship in most ways, but it has two or more owners. The partners share the profits and losses of the business accounting to a prearranged formula. Generally, any partner can obligate the business to another party, and personal resources of each partner can be called on to pay the obligations. A partnership must be dissolved if the ownership changes, as when a parent leaves or dies. If the business it to continue as a partnership after this occurs, a new partnership must be formed.

Bookkeeping

is mechanical and repetitive; it is the process of recording financial transactions and keeping financial records. It is a small--but important--part of accounting.

Financial Accounting Standards Board (FASB)

is the most important body for developing rules on accounting practice. This independent body has been designated by the Securities and Exchange Commission (SEC) to issue Statements of Financial Accounting Standards.

Independence

means the accountant avoids all relationships that impair or even appear to impair his or her objectivity

Integrity

means the accountant is honest and candid and subordinates personal gain to service and the public trust.

Objectivity

means the accountant is impartial and intellectually honest

Management Accounting

provides internal decision makers, who are charged with achieving the goals of profitability and liquidity, with information about operating, investing, and financing activities. Managers and employees who conduct the activities of the business need information that tells them how they have done in the past and what they can expect in the future.

Financial Position

refers to a company's economic resources, such as cash, inventory, and buildings, and the claims against those resources at a particular time.

Management

refers to the people who are responsible for operating a business and meetings its goals of profitability and liquidity. In a small business, management may consist solely of the owners. In a large business, managers must decide what to do, how to do it, and whether the results match their original plans. Successful manages consistently make the right decisions based on timely and valid information.

Owner's Equity

represents the claims by the owner of a business to the assets of the business. Theoretically, owner's equity is what would be left if all liabilities were paid, and it is sometimes said to equal the net assets.

Statement of Owner's Equity

shows the changes in owner's equity over an accounting period.

Income Statement

summarizes the revenues earned and expenses incurred by a business over an accounting period. Many people consider it the most important financial report because it shows whether a business achieved its profitability goals--that is, whether it earned an acceptable income.

Profitability

the ability to earn enough income to attract and hold investment capital

Liquidity

the ability to have enough cash to pay debts when they are due

Due Care

the accountant must also exercise this in all activities, carrying out professional responsibilities with competence and diligence.

Financial Analysis

the evaluation and interpretation of financial statements and related performance measures

Cash Flows

the inflows and outflows of cash into and out of a business. Net cash flows are the difference between the inflows and outflows.

Fraudulent Financial Reporting

the intention preparation of misleading financial statements.

Corporate governance

the oversight of a corporation's management and ethics by its board of directors. Corporate governance is going and is clearly in the best interest of a business.

American Institute of Certified Public Accountants (AICPA)

the professional association of certified public accountancies, influences accounting practice through the activities of its senior technical committees.

Balance Sheet

the purpose is to show the financial position of a business on a certain date, usually the end of the month or year. For this reason, it is often called the statement of financial position and is dated a s of a specific date. The balance sheet presents a view of the business as the holder of resources, or assets that are equal to the claims against those assets.

Financial Statements

the reports that are generated to communicate to external decision makers s they can evaluate how well the business has achieved its goals

Exchange Rate

the value of one currency in terms of another. In effect, currencies are goods that can be bought and sold.

Net Assets

theoretically, owner's equity is what would be left if all liabilities were paid, and it is sometimes said to equal this.

Generally Accepted Accounting Principles (GAAP)

to ensure that financial statements are understandable to their users, a set of practices, called GAAP, has been developed to provide guidelines for financial account. "Generally accepted accounting principles encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particle time. In other words, GAAP arose from wide agreement on the theory and practice of accounting at a particular time. These "principles" are not like the unchangeable laws of nature in chemistry or physics. They evoke to meet the needs of decision makers, and they change as circumstances change or as better methods are developed.

Audit Committee

to strengthens corporate governance, a provision of the Sarbanes-Oaxley Act requires boards of directors to establish this committee made up of independent directors who have financial expertise.

Net Loss

when expenses exceed revenues, the difference is called this

Net Income

when revenues exceed expenses the deference is called this

Statement of Cash Flows

whereas the income statement focuses on a company's profitability, this focuses on its liquidity

Governmental Accounting Standards Boards (GASB)

which is under that same governing body as the FASB, issues accounting standards for state and local governments.