Chapter 1

Financial accounting and generally accepted accounting principles are based upon the following assumptions:

-Monetary unit -Time period -Business entity -Going concern

a statement of cash flow consists of the following three sections:

1. operating activities 2. investing activities 3. financing activities

Accounting equation:

Assets = Liabilities + Stockholders' Equity

Public accountants who have met a state's education, experience, and examination requirements may become

Certified Public Accountants (CPAs).

What makes amounts objective under the measurement principle?

If it is based upon independent unbiased evidence.

Outside the United States, most countries use accounting standards and principles adopted by the...

International Accounting Standards Board (IASB)

The following four principles are an integral part of financial accounting...

Measurement Historical cost Revenue recognition Expense recognition

Accountants and their staff who provide services on a fee basis are said to be employed in...

Public Accounting

SOX established a new oversight body for the accounting profession called the

Public Company Accounting Oversight Board (PCAOB).

The ratio of liabilities to stockholders' equity is computed as follows:

Ratio of Liabilities to Stockholder's Equity = Total Liabilities / Total Stockholders' Equity

As a result of accounting and business frauds, Congress passed laws to monitor the behavior of accounting and business, such as the

Sarbanes-Oxley Act (SOX)

managerial accounting or management accounting

The area of accounting that provides internal users, such as managers and employees, with information is called ...

An account receivable is ...

a claim against the customer, which is an asset.

GAAP is a collection of ______ _____, ________, and ________ that define how financial information will be reported

accounting standards, principles, assumptions.

The cash flows from investing activities section reports the cash transactions for the ...

acquisition and sale of relatively permanent assets

the time period assumption...

allows a company to report its economic activities on a regular basis for a specific period of time.

The measurement principle determines the...

amount that will be recorded and reported.

Business transaction:

an economic event or condition that directly changes an entity's financial condition or its results of operations.

In the business entity assumption, the business is viewed as...

an entity separate from its owners, creditors, or other businesses.

Transactions between two independent parties, called ________________, provide amounts that are ________ and ____________.

arms-length transactions; objective; verifiable.

Expenses

assets used in the process of earning revenue

Accounting

can be defined as an information system that provides reports to users about the economic activities and condition of a business

the cash flows from operating activities section reports a summary of ....

cash receipts and cash payments from operations

the cash flows from financing activities section reports the...

cash transactions related to cash investments by stockholders, borrowings, and dividends.

A corporation issues _______ ______ to investors as proof of their ownership rights.

common stock

Stockholders' equity is classified as:

common stock retained earnings

Liabilities are usually shown before equity in the accounting equation because....

creditors have first rights to the assets.

Dividends

distributions of earnings to stockholders.

What affects earnings, or net income

each increase or decrease in stockholders equity, not dividends.

The expense recognition principle, sometimes called the matching principle, requires ...

expenses to be recorded in the same period as the related revenue. Doing so allows the reporting of a profit or loss for the period.

Instead of receiving cash at the time services are provided or goods are sold, a business may accept payment at a later date. such revenues are described as... For example, if netsolutions had provided services on account instead of for cash, transaction D would have been described as follows:

fees earned on account or sales on account; fees earned on account

The area of accounting that provides external users, such as investors, creditors, customers, and the government, with information is called....

financial accounting

The going concern assumption requires that...

financial reports be prepared assuming that the entity will continue operating into the future.

Financial information in the US is based on

generally accepted accounting principles (GAAP).

Net loss

if expenses exceed revenue, the excess is called a net loss

the ratio of liabilities to stockholders' equity is useful

in analyzing the ability of a company to pay its creditors.

The primary financial statements of a corporation are the:

income statement retained earnings statement balance sheet statement of cash flows

In public accounting, an accountant may practice as an _______ or as a member of a ________

individual; public accounting firm

Recall that the stockholder is the person who can ________ in the company. Remember that the equality of the accounting equation must be maintained while two accounts are affected by this transaction.

invest

business

is an organization in which basic resources (inputs), such as materials and labor, are assembled and processed to provide goods and services (outputs) to customers.

An amount is verifiable under the measurement principle if...

it can be confirmed by a third party.

Prepaid expenses

items such as supplies that will be used in the business in the future, which are assets.

Ethics

moral principles that guide the conduct of individuals.

The measurement principle requires that amounts be ______ and _______

objective; verifiable

a balance sheet reports the amount

of assets, liabilities, and stockholders' equity as of a specific date.

General-purpose financial statements are...

one type of financial accounting report that is distributed to external users.

Assets are items _____ by the company, while liabilities are _______ or _________, and stockholders' equity represents the stockholders' rights to the assets as determined through _______ and ________

owned; debts; payables; revenues; expenses

For a proprietorship, partnership, or limited liability company, equity is called ....

owner's equity.

The report form

presents a balance sheet in a vertical form

Managerial accountants employed by a business are employed in

private accounting

The objectives of most businesses is to earn a

profit

You have probably used a credit card to buy clothing or other merchandise. In this type of transaction, you received clothing for a promise to pay your credit card bill in the future. That is, you received an asset and incurred a liability to pay for a future bill. this type of transaction is called a

purchase on account.

Profit is the difference between the amounts ...

received from customers for the goods or services and the amounts paid for the inputs used to provide the goods or services.

Historical cost principle or cost principle

recording an item at its initial transaction price

The objective of managerial accounting is to provide _______ for managers' and employees' __________ __________ _________

relevant and timely information; decision-making needs.

The monetary unit assumption...

requires that financial reports be expressed in a single money unit, or currency

Fees earned

revenue from providing services

The income statement reports the ....

revenues and expenses for a period of time, based on the revenue and expense recognition principles.

Revenue from the sale of merchandise is recorded as

sales

Common stock

shares of ownership distributed to investors of a corporation.

Since stockholders own a corporation, equity is called

stockholder's equity

Retained earnings is the

stockholders' equity created from business operations through revenue and expense transactions.

paying an amount on account is different from paying an expense. the paying of an expense reduces _______ ________, paying an amount on account reduces the amount owed on a _______.

stockholders' equity; liability

Financial statements

the accounting reports providing information after transactions have been recorded and summarized.

Revenue

the amount earned for selling goods and services to customers.

The business entity assumption limits...

the economic data in financial reports to that directly related to the activities of the business.

Net income, net profit, or earnings

the excess of the revenue over the expenses

Accounting principles and assumptions provide ...

the framework upon which accounting standards are constructed.

Account payable

the liability created by a purchase on account

Assets

the resources owned by a business

Liabilities

the rights of creditors are the debts of the business

Equity

the rights of owners

Accounting standards are

the rules that determine the accounting for individual business transactions.

The revenue recognition principle determines...

when revenue is recorded in the accounting records.