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