Ch 1
guidelines for behaving ethically
1. Identify an ethical decision by using your personal ethical standards of honesty and fairness. 2. Identify the consequences of the decision and its effect on others. 3. Consider your obligations and responsibilities to those who will be affected by your decision. 4. Make a decision that is ethical and fair to those affected by it.
describe the nature of a business
A business is an organization in which basic resources (inputs), such as materials and labor, are assembled and processed to provide goods or services (outputs) to customers.
describe the role of accounting and ethics in business
Accounting can be defined as an information system that provides reports to users about the economic activities and condition of a business. The process by which accounting provides information to users is as follows: 1. Identify users. 2. Assess users' information needs. 3. Design the accounting information system to meet users' needs. 4. Record economic data about business activities and events. 5. Prepare accounting reports for users.
state the accounting equation and each element of the equation
Assets = Liabilities + Owner's Equity
Sarbanes-Oxley Act
Federal legislation passed in 2002 that sets higher ethical standards for public corporations and accounting firms. Key provisions limit conflict-of-interest issues and require financial officers and CEOs to certify the validity of their financial statements.
who has the primary responsibility for developing accounting standards?
Financial Accounting Standards Board (FASB)
describe generally accepted accounting principles
GAAP is a collection of accounting standards, principles, and assumptions that define how financial information will be reported.
Describe and illustrate how business transactions can be recorded in terms of the resulting change in the elements of the accounting equation.
The effect of every transaction is an increase or a decrease in one or more of the accounting equation elements. The two sides of the accounting equation are always equal. The stockholders' equity is increased by amounts invested by stockholders (common stock). The stockholders' equity is increased by revenues and decreased by expenses. The stockholders' equity is decreased by dividends paid to stockholders.
describe the role of ethics in accounting and business
The objective of accounting is to provide relevant, timely information for user decision making. Accountants must behave in an ethical manner so that the information they provide users will be trustworthy and, thus, useful for decision making. Managers and employees must also behave in an ethical manner in managing and operating a business. Ethics are moral principles that guide the conduct of individuals.
time period assumption
allows a company to report its economic activities on a regular basis for a specific period of time
Securities and Exchange Commission (SEC)
has authority over the accounting and financial disclosures for companies whose shares of ownership (stock) are traded and sold to the public
business entity assumption
limits the economic data in financial reports to that directly related to the activities of the business
financial accounting principles
measurement, historical cost, revenue recognition, expense recognition
For which of these business types is the accounting equation relevant?
merchandise, manufacturing, service
Financial accounting and generally accepted accounting principles are based upon the following assumptions:
monetary unit, time period, business entity, going concern
owner's equity
name for equity for a proprietorship, partnership, or limited liability company
accounting principles and assumptions
provide the framework upon which accounting standards are constructed
historical cost principle
recording an item at its initial transaction price
expense recognition principle
requires expenses to be recorded in the same period as the related revenue
measurement principle
requires that amounts be objective and verifiable
revenue recognition principle
requires that companies recognize revenue in the accounting period in which the performance of services or goods provided is satisfied
monetary unit assumption
requires that financial reports be expressed in a single money unit or currency
going concern assumption
requires that financial reports be prepared assuming that the entity will continue operating into the future
assets
resources owned by a business
liabilities
rights of creditors are the debts of the business and are called
equity
rights of owners
What is equity called when stockholders own a corporation?
stockholders' equity
Accounting Standards
the rules that determine the accounting for individual business transactions
Describe the financial statements of a corporation and explain how they interrelate.
•The retained earnings statement reports the changes in the retained earnings for a period of time. •It is prepared after the income statement because the net income or net loss for the period must be reported in this statement. •Similarly, it is prepared before the balance sheet, since the amount of retained earnings at the end of the period must be reported on the balance sheet.
