Exam Study Guide Financial Accounting Fourth Edition Chapter 1 Definitions

Accounting

A system of maintaining records of  a company's operations and communicating that information to decision makers.

Accounting equation

Assets = Liabilities + Stockholder's Equit

Accounting Equation Definition

Equation that shows a company's resources (assets) equal creditor's and owner's claims to those resources (Liabilities and stockholder's equity).

Assets

Resources of a companyExample:A) Cash B) Account Receivables C) Land D) Equipment Etc...*Has a debit balance

Auditors

Trained individuals hired by a company as an independent party to express a professional opinion of the conformity of that company's financial statements with GAAP (Generally accepted accounting principles).

Balance Sheet

A financial Statement that presents the financial position of the company on a particular date.A = L + SE 

Comparability

The ability of users to see similarities and differences between two different business activities. 

Consistency

The use of similar accounting procedures either over time for the same company, or across companies at the same point in time. 

Corporation 

An entity that is legally separate from its owners. This is an advantage when it comes to Limited Liability. This is also a disadvantage because corporations are taxed doubly. Once for the Corporation itself then again on the dividends paid out to its stockholders. 

Cost Constraint

Financial Accounting information is provided only when the benefits of doing so exceed the cost. Example: Providing certain information is useful both to investors and the competition. It is up to the company to determine whether providing the information will be worth the possible financial cost of releasing it to competitors. 

Decision Usefulness

The ability of the information to be useful in decision making. Questions to ask are :1. Is it useful to investors and creditors in decision making?2. Does it help predict cash flow?3. Does it tell what resources, claims to resources, and changes in resources and claims?

Dividends

Cash payments to stockholders.Note * reduces retained earnings balance and is shown in the statement of Stockholder's Equity. This account has a debit balance.

Economic Entity Assumption 

All economic events with a particular economic entity can be identified. Is a GAAP underlying assumption.

Ethics

A code or moral system that provides criteria for evaluating right and wrong behavior. Think about the Enron Scandal and how that affected Arthur Anderson. Without client, investor, or creditor confidence your work isn't worth anything but the paper it is printed on.

Expenses

Costs of providing products and services. Reported on the Income statement. This account has a Debit balance

Faithful representation 

Accounting information that is complete, neutral, and free from error. Qualitative Characteristics - Fundamental Characteristics

Financial accounting 

Measurement of business activities of a company and communication of those measurements to external parties for decision making purposes. 

FASB

Financial Accounting Standards Board

Financial Accounting standards board

An independent private body that has primary responsibility for the establishment of GAAP in the United States. 

Financial Statements

Periodic reports published by the company for the purpose of providing information to external users. Examples:A) investorsB) creditors

GAAP

Generally accepted accounting principles

Generally accepted accounting principles

The rules of financial accounting handed sown by the FASB. 

Going Concern Assumption

In the absence of information to the contrary a business entity will continue to operate indefinitely. GAAP Underlying assumption

Income Statement

A financial statement that reports the company's revenues and expenses over an interval of time.* Related Equation : Net Income= Revenues - Expenses

IASB

International Accounting Standards Board

International Accounting Standards Board

An international accounting standard-setting body responsible for the convergence of accounting standards worldwide. 

IFRS

International Financial Reporting Standards

International Financial Reporting Standards 

The standards being developed and promoted by the international accounting standards board. 

Liabilities 

Accounts owed to creditors. Examples: Notes Payable, Accounts payable, Salaries payable. Etc....*Has a credit balance

Monetary Unit Assumption

A unit or scale of measurement can be used to measure financial statement elements. GAAP Underlying assumption 

Net Income 

Difference between revenues and expenses. used on the income statement and the statement of stockholders equity. 

Partnership

Business owned by two or more persons. Only taxed once on each partners individual return. Uses K-1's. 

Periodicity Assumption

The economic life of an enterprise (presumed to be indefinite) can be divided into artificial time periods for financial reporting. GAAP Underlying assumption.

Relevance 

Accounting information that possesses confirmatory value and/or predictive value, and that is material.Qualitative Characteristics

Retained Earnings

Cumulative amount of net income earned over the life of the company that has been kept (retained) in the business rather than distributed to stockholders as dividends. * used in the statement of stockholders equity and balance sheet. It also has a credit balance

Revenues

Amounts recorded when the company sells products or services to customers. This account has a credit balance. 

Sarbanes Oxley Act 

2002- Formally called the Public Company Accounting Reform and Investor Protection Act. This act provides regulation of auditors and the types of services they furnish to clients, increases accountability of corporate executives, addresses conflicts of interest for securities analysts, and provides for stiff criminal penalties for violators. Example: Think Enron and Arthur Anderson (Arthur Anderson did not keep their workpapers and it ruined their reputation when the scandal came out)

SOX

Sarbanes Oxley Act 2002

Sole Proprieorship

A business owned by one person. Is taxed by the owning individuals self employment  tax rate. 

Statement of Cash Flows

a financial statement that measures activities involving cash receipts and cash payments over an interval of time. Operating, Investing, and Financing - inflow & outflow

Stockholder's Equity

The stockholder's and owner's claims to resources which equal the difference between total assets and liabilities. Usually has a credit balance and is made up of the sum of retained earnings and common stock. *Assets- Liabilities = Stockholder's Equity

Timeliness

Information being available to users early enough to allow them to use it in the decision process. 

Statement of stockholder's equity

A financial statement that summarizes the changes in stockholder's equity over an interval of time.1) Stockholder's Equity = Common Stock + Retained Earnings 2) Retained Earnings= Net Income - Dividends 3) Net Income = Revenue - Expenses (see income statement)

Understandability

Users must understand the information within the context of the decision they are making.

Verifiability 

A consensus among different measures. 

Underlying assumptions 

Part of the GAAP : 1. Economic Entity 2. Monetary Unit 3. Periodicity              4. Going Concern

Qualitative characteristics 

1. Relevance - Confirmatory value, predictive value, and Materiallity.2. Faithful Representation- Completeness, Neutrality, Freedom from error.3. Decision Usefulness (overriding objective) - Comparability (consistency), Verifiability, Timeliness, Understandability. 

Fundamental Characteristics

Faithful Representation & Relevance

Enhancing Characteristics

Comparability, Verifiability, Timeliness, and Understandability

Private Accounting

providing accounting services to the company that employs you

Public Accounting

are professional service firms that traditionalyy have focused on auditing, tax preparation, and consulting. 

Securities Exchange Commission 

1934 act created this government organization and gives the SEC power to require companies listed in the stock exchange to prepare periodic statements

SEC

Securities exchange commission created in 1934

Securities Act

1933 designed to restore investor confidence in financial accounting after the 1929-1932 Stock market Crash. 

The Securities Exchange Act 

1934 Act that created the SEC. 

Business Activities

Operating, Financial, and Investing