Accounting Principles Chap 1-3

Corporation

A company that is legally separate from its owners

Limited Liability

Prevents stockholders from being held personally responsible for the financial obligations of the corporation

Sole Proprietorship

Is a business owned by one person

Financial Statements

Are periodic reports published by the company for the purpose of communicating a company’s business activities to those outside the company.

Income Statement

Is a financial statement that reports revenue and expenses over a time period

Net income

Is when revenue exceeds expenses

The statement of stockholders equity

Is a financial statement that sums the changes in stockholders’ equity over a time period

Common stock

Represents amounts invested by stockholders when they purchase shares of stock

The common stock equation is;

Beginning common stock + New issuances = ending common stock

Retained earnings

represent all net income minus all dividends over the life of the company

Ending retained earnings equation is:

Beginning retained earnings + net income - dividends = ending retained earnings

Balance sheet

Presents financial position on a specific date

Statement of cash flows

A financial statement that measure activities involving cash payments and cash receipts over a time period

Operating cash flows

A type of cash transaction. Includes cash receipts and cash payments for transactions involving revenue and expense activities during the period.

Investing cash flows

A type of cash transaction. Includes cash transactions for the purchase and sale of investments and long-term assets.

Financing cash flows

A type of cash transaction. Includes cash transactions with lenders, such as borrowing money and repaying debt, and with stockholders, such as issuing stock and paying dividends.

Generally accepted accounting principles (GAAP) are

Formal standards that all companies follow

Securities and exchange commission (SEC)

Is an agency that oversees and enforces finance requirements

Financial accounting standards board (FASB)

An independent, private sector body that has responsibility for establishing accounting and reporting standards for all companies in US. Under SEC.

Fiscal year

A 12-month period that a company chooses to use for accounting purposes.

The accounting cycle

The full set of procedures used to accomplish the two-step process of financial accounting

External transactions

Are between a company and a separate outside entity.

An account

Provides a record of the business activities related to a particular item

A chart of accounts

Provides a list of all account names used to record transactions of a company

Journal

Provides a chronological record of all transactions affecting a firm