Chapter 1: Accounting in Action
Investors
(Owners) use accounting information to decide whether to buy, hold, or sell ownership shares of a company.
Creditors
(suppliers and bankers) use accounting information to evaluate risks of granting credit or lending money.
Corporation
A business organized as a separate legal entity under state corporation law, having ownership divided into transferable shares of stock.
Proprietorship
A business owned by one person.
Partnership
A business owned by two or more persons associated as partners.
Accounting reports
A company communicates collected information to interested users by means of _______________. The most common of these reports are called financial statements.
Income statement
A financial statement that presents the revenues and expenses and resulting net income or net loss of a company for a specific period of time.
Balance sheet
A financial statement that reports the assets, liabilities, and owner's equity at a specific date.
Statement of cash flows
A financial statement that summarizes information about the cash inflows (receipts) and cash outflows (payments) for a specific period of time.
Owner's equity statement
A financial statement that summarizes the changes in owner's equity for a specific period of time.
Securities and Exchange Commission
A governmental agency that oversees U.S financial markets and accounting standard-setting bodies.
Bookkeeping
A part of the accounting process that involves only the recording of economic events.
Financial Accounting Standards Board
A private organization that establishes generally accepted accounting principles in the United States (GAAP).
Analyze and interpret
A vital element in communicating economic events is the accountant's ability to _____________ reported information.
Forensic Accounting
AN area of accounting that uses accounting, auditing, and investigative skills to conduct investigations into theft and fraud.
Governmental Accounting
Accounting opportunities in governmental agencies
Fair value principle
An accounting principle stating that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability).
Historical cost principle
An accounting principle that states that companies should record assets at their cost.
International Accounting Standards Board
An accounting standard-setting body that issues standards adopted by many countries outside of the United State.
Public accounting
An area of accounting in which the accountant offers expert service to the general public.
Private or managerial accounting
An area of accounting within a company that involves such activities as cost accounting, budgeting, design and support of accounting information systems, and tax planning and preparation.
Taxation
An area of public accounting involving tax advice, tax planning, preparing tax returns, and representing clients before governmental agencies.
Management consulting
An area of public accounting ranging from development of accounting and computer systems to support services for marketing projects and merger and acquisition activities.
Monetary unit assumption
An assumption stating that companies include in the accounting records only transaction data that can be expressed in terms of money.
Economic entity assumption
An assumption that requires that the activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities.
Assets = Liabilities + Owner's Equity
Basic accounting equation
in the aggregate
By reporting data ___________, the accounting process simplifies a multitude of transactions and makes a series of activities understandable and meaningful.
Generally accepted accounting principles
Common standards that indicate how to report economic events
Recording
Consists of keeping a systematic, chronological diary of events
Liabilities
Creditor claims against total assets. Claims of those to whom the company owes money.
Assets = Liabilities + Owner's Equity - Owner's Drawing + Revenue - Expenses
Expanded accounting equation
Relevance
Financial information that is capable of making a difference in a decision.
Owner's drawings and expenses
In a proprietorship, they DECREASE owner's equity.
Owner's investment and revenues
In a proprietorship, they INCREASE owner's equity.
External Users
Individuals and organizations outside a company who want financial information about the company.
International Financial Reporting Standards
International Accounting Standards set by the International Accounting Standards Board (IASB).
Economic entity
It can be any organization or unit in society.
Sarbanes-Oxley Act
Law passed by Congress intended to reduce unethical corporate behavior.
Bluechips
Most valuable share in the stock market
Faithful representation
Numbers and descriptions match what really existed or happened - they are factual.
Assets
Resources a business owns.
Operating Accounting
Section of accounting that answers the question, "How much is the revenue?"
Net loss
The amount by which expenses exceed revenues.
Net income
The amount by which revenues exceed expenses.
Investments by owner
The assets an owner puts into the business
Expenses
The cost of assets consumed or services used in the process of earning a revenue.
Transactions
The economic events of a business that are recorded by accountants. (or Business Transactions)
Auditing
The examination of financial statements by a certified public accountant in order to express an opinion as to the fairness of presentation.
Financial accounting
The field of accounting that provides economic and financial information for investors, creditors, and other external users. It deals with assets, liabilities and properties. Generates income of the business.
Managerial accounting
The field of accounting that provides internal reports to help users make decisions about their companies. Involves planning, directing, and controlling economic events.
Revenues
The gross increase in owner's equity resulting from business activities entered into for the purpose of earning income.
Accounting
The information system that identifies, records, and communicates the economic events of an organization.
Luca Pacioli
The origins of accounting are generally attributed to his work
Owner's equity
The ownership claim on total assets. Residual equity.
Convergence
The process of reducing the differences between U.S GAAP and IFRS.
Ethics
The standards of conduct by which actions are judged as right or wrong, honest or dishonest, fair or not fair.
Internal users
These users of accounting information are managers who plan, organize, and run the business. Include marketing managers, production supervisors, finance directors, and company officers.
Customers
They are interested in whether a company will continue to honor product warranties and support its product lines.
Taxing authorities
They want to know whether the company complies with tax laws (e.g. Internal Revenue Service).
Regulatory agencies
They want to know whether the company is operating within prescribed rules. (e.g. Securities and Exchange Commission or Federal Trade Commission)
Labor unions
They want to know whether the owners have the ability to pay increased wages and benefits.
Basic accounting equation
This equation provides the underlying framework for recording and summarizing economic events.
Identifies, records, communicates
Three basic activities of accounting
Integrity and Transparency
Two core values of accounting
Investors and creditors
Two most common types of external users
Drawings
Withdrawal of cash or other assets from an unincorporated business for the personal use of the owner(s).
Assumptions
______________ provide a foundation for the accounting process.
Internal Transactions
are economic events that occur entirely within one company
External Transactions
involve economic events between the company and some outside enterprise