ACG2021 Financial Accounting Chapter 1

"On credit" and "on account" means

Cash is received or paid at a future date

What are the two types of accounting principles (and assumptions)

General principles and specific principles

External (independent) auditors (external user)

examine financial statements to verify that they are prepared according to generally accepted accounting principles

People using accounting information are divided into two groups:

external users and internal users

Financial Accounting focuses on needs of __________ such as ___________________.

external users; lenders, nonmanagerial employees, shareholders, external auditors, regulators

What are the four accounting assumptions

going concern, monetary unit, time period, business entity

Managerial Accounting focuses on the needs of ______________ such as _____________________.

internal users; purchasing managers, HR managers, production manager, distribution manager

The financial accounting standards board (SASB)

is given the task of setting up GAAP from the securities and exchange commission (SEC)

What is the three-step process for making ethical decisions?

1. Identify ethical concerns: Use ethics to recognize an ethical concern 2. Analyze options: Consider all consequences 3. Make ethical decisions: Choose best option after weighing all consequences

Data visualization

A graphical presentation of data to help people understand their significance

Data analytics

A process of analyzing data to identify meaningful relations and trends

___________ is called the language of business because _______________________.

Accounting; it communicates data that help people make better decisions.

Receivable

An asset that promises a future and flow of resources

Accounting equation also called balance sheet equation

Applies to all transactions and events, to all companies and organizations, and to all points in time. Assets = liabilities + equity This equation can be rearranged

Dividends

Are outflows of cash and other assets to shareholders that reduce equity

Time period assumption

Assumption that organizations activities can be divided into specific time period such as months, quarters, or years And useful reports can be prepared for those periods

Ethics

Beliefs that separate right from wrong. They are accepted standards of good and bad behavior.

Identify the accounting principle or assumption that best reflects each situation. Alfonso owns consulting LLC. Alfonzo Keith personal expenses separate from LLC expenses.

Business entity assumption (requires that a Buisness is accounted for separately from other business entities Including its owner or owners)

Assets include

Cash, supplies, equipment, land, and accounts receivable

Liabilities

Creditors claims on assets. These claims are obligations to provide assets, products, or services to others

Relevant information affects

Decisions of users

Expenses

Decrease equity (via net income) from cost of providing products and services to customers; examples are cost of employee time use of supplies advertising utilities and insurance face

Balance sheet

Describes a companies financial position types and amounts of (assets, liabilities, and equity) at a point in time

Income statement

Describes a companies revenues and expenses and computes net income or loss over a period of time. Revenues — expenses = net income

Equity decreases from

Dividends and expenses

Remember that after each transaction and event assets always

Equals liabilities plus equity

External transactions are

Exchanges of value between two entities, which cause changes in the accounting equation. An example is the sale of Apple care protection plan by Apple

Internal transactions are

Exchanges within an entity, which may or may not affect the accounting equation. An example is targets use of its supplies, which is reported as expenses when used.

Equity can be separated into four parts to get the

Expanded accounting equation

Statement of retained earnings

Explains changes and retained earnings from net income (or loss) and any dividends over a period of time

What are the four areas of opportunities in accounting?

Financial, managerial, taxation, and accounting

Financial accounting is governed by concepts and rules known as

Generally accepted accounting principles (GAAP)

Examples of internal controls are:

Good records, physical controls (locks), and independent reviews.

International Accounting Standards Board (IASB)

Group that identifies preferred accounting practices and encourages global acceptance; issues international financial reporting standards (IFRS)

Events are

Happening that affect the accounting equation and are reliably measured. They include business events such as changes in the market value of certain assets and liabilities and natural events such as flyers that destroys assets include losses

Regulators (external user)

Have legal authority over certain activities of organizations. For example, the internal revenue service (IRS) requires accounting reports for computing taxes

Service managers (internal users)

He's reports to provide better service to customers

Revenues

Increase equity (via net income) from sales of products and services to customers; examples are sales of products, consulting services provided, facilities rented to others, and commission from services

Faithful representation means

Information accurately reflects the business results

Accounting

Information and measurement system that identifies, records, and communicates relevant information about a company's business activities

Objectivity

Information is supported by independent, unbiased evidence

Research and development manager's (internal users)

Is information on projected cost and revenues of innovations

A payable is a

Liability that promises a future outflow of resources. Examples are wages payable to workers, accounts payable to suppliers, notes (loans) payable to banks, and taxes payable

What are the four general principles?

Measurement principal (cost principal) revenue recognition principal expense recognition principle full disclosure principle

Identify the accounting principle or assumption that best reflects each situation. Ming studios purchase his camera equipment for $12,000 cash. The owner thinks the equipment is worth $18,000 cash. The equipment is recorded at $12,000 cash.

Measurement principal(assets are measured on a cash or equal to cash basis. Since mean paid $12,000 cash for the equipment, it's reported on the balance sheet at $12,000.

Human resource managers (internal users)

Need information about employees payroll, benefits, and performance

Distribution managers (internal users)

Need reports for timely an accurate delivery of products and services

Purchasing managers (internal users)

Need to know what, when, and how much to purchase

The financial accounting standards board consist of

Objectives: to provide information useful to investors, creditors, and others qualitative characteristics: to require information that has relevance and faithful representation elements: to define items in financial statements measurement on measurement: to set criteria for an item to be recognized as an element, and how to measure it

Limited Liability Company (LLC)

One or more, called members. no additional business income tax. Limited liability. Owners, called members, or not personally liable for LLC debts. A separate entity with the same rights and responsibilities as a person. Business life indefinite.

Corporation

One or more, called shareholders, can get mini investors by selling stock or shares of corporate ownership. Additional corporate income tax. Limited liability. Owners, called shareholders or stockholders, or not liable for corporate ask and debts Business life is indefinite.

Sole proprietorship

One owner, easy to set up. no additional business income tax. Unlimited liability. Owner is personally liable for proprietorship debts. Not a separate legal entity. Business ends with owner death or choice.

What are the three factors of the fraud triangle?

Opportunity: A person must be able to commit fraud with a low risk of getting caught Pressure or incentive: a person must feel pressure or have incentive to commit fraud Rationalization or attitude: a person justifies fraud or does not see it's criminal nature

Internal controls

Our procedures to protect assets, ensure reliable accounting, promote efficiency, and uphold company policies

Equity increases from

Owner investments called stock issuance and from revenues

Recordkeeping/Bookkeeping

Part of accounting that involves recording transactions and events, either manually or electronically

Internal users

Persons using accounting information who are directly involved in managing the organization.

External users

Persons using accounting information who are not directly involved in running the organization.

Expense recognition principle (matching principle)

Prescribes expensive reported in the same period as the revenues that were earned as a result of the expense

The key to stop in fraud is to focus on

Prevention

Monetary Unit Assumption

Principal that assumes transactions and events can be expressed in money units. Examples of monetary units are the US dollar and the Mexico peso

Going concern assumption

Principal that prescribe financial statements to reflect the assumption that the business will continue operating Instead of being closed or sold. This means, for example, that property is reported at cost instead of liquidation value

Business entity assumption

Principal that requires a business to be accounted for separately from its owner(s) and from any other entity

Measurement principal

Principle that prescribes financial statement information, and it's underlying transactions and events, be based on relevant measures evaluation, also called the cost principle. governs valuation of assets and liabilities on the balance sheet.

Full disclosure principal

Principle that prescribes financial statements including notes to report all relevant information about an entity's operation in financial condition That would impact users decision

The fraud triangle shows three factors that:

Push a person to commit fraud

Common stock

Reflects employees of cash and other net assets from shareholders in exchange for stock (stock is part of contributed capital)

Generally accepted accounting principles (GAAP) wants information to have

Relevance and faithful representation

Artificial intelligence in accounting

Repetitive task such as entering invoice and transactions data will be done by AI and software

Assets are

Resources a company owns or controls.

Identify the accounting principle or assumption that best reflects each situation. AAA Painting performs services for Customer. AAA records revenue this period. Even though the customer is not billed until next period

Revenue recognition principle (revenue is recognize when the work is done, When the goods and services are delivered regardless of when the customer is billed or pays)

International Financial Reporting Standards (IFRS)

Set of international accounting standards explaining how types of transactions and events are reported in financial statements; IFRS are issued by the international accounting standards board

Together liabilities and equity are the

Source of funds to acquire assets

Materiality

The ability of information to influence decisions, is also sometimes mentioned as a constraint

Revenue (Sales)

The amount received from selling products and services. The amount received is usually in cash, but it can also be a customers promise to pay at a future date called credit sales

Conceptual framework

The basic concepts that underlie the preparation and presentation of financial statements for external users; can serve as a guide in developing future standards and resolving accounting issues that are not addressed directly in current standards using the definitions, recognition criteria, and measurement concepts for assets, liabilities, revenues, and expenses

Auditors verify

The effectiveness of internal controls

Assumptions are generally related to

The financial statement headings

Call spinefit constraint or Cost constraint

The notion that the benefit of a disclosure exceeds the cost of that disclosure. Information disclosed by the entity must have benefits to the user that are greater than the cost of providing it.

Equity

The owners claim on assets and is equal to assets minus liabilities. Also called net assets or residual equity. Equity = Assets - Liabilities

Revenue recognition principle

The principal prescribing that revenue is recognized when goods or services are delivered to customers at the amount expected to be received from the customer. governs the timing of revenues recognized on the income statement. Revenue is recognized when earned

To recognize means

To record it

Business activities are described in terms of

Transactions and events

For information to be useful, it must be

Trusted

Partnership

Two or more, called partners, easy to set up. No additional business income tax. Unlimited liability. Partners or jointly liable for partnership debts. Not a separate legal entity. Business ends with a partner death or choice.

Securities and Exchange Commission (SEC)

U.S. Government agency that oversees proper use of GAAP by companies that sell stock and debt to the public

Customers (external user)

Use financial reports to assess the stability of potential suppliers

Suppliers (external user)

Use information to analyze a customer before extending credit

Voters and government officials (external user)

Use information to evaluate government performance

Production managers (internal users)

Use information to monitor costs and ensure quality

Marketing managers (internal users)

Use reports to target consumers, set prices, and monitor consumer needs

An audit examines

Whether financial statements are prepared using GAAP

Shareholders(investors) (external user)

are the owners of corporations. They use accounting reports to decide whether to buy, hold, or sell stock.

General principles

assumptions, concepts, and guidelines for preparing financial statements

The four parts of equity is

common stock, dividends, revenues, expenses

Specific principles

detailed rules used in reporting business transactions and events; They are described as we encounter them

Lenders (creditors) (external user)

loan money or other resources to an organization

Nonmanagerial and nonexecutive employees and labor unions (external user)

use external information to bargain for better wages

Contributors to nonprofits (external user)

use information to evaluate the use and impact of donations

Accounting shows two basic aspects of a company:

what it owns and what it owes