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