Business and Accounting Fundamentals Flashcards

Vocabulary practice flashcards covering business types, accounting principles (GAAP, SEC, FASB), financial reporting characteristics, and types of business entities.

Business

An organization in which basic resources (inputs), such as materials and labor, are assembled and processed to provide goods or services (outputs) to customers.

Profit

The difference between the amounts received from customers for goods or services and the amounts paid for the inputs used to provide the goods or services.

Profit Equation

$$Profit = Revenue - Expenses$$

Service Businesses

Businesses that provide services rather than products to customers.

Retailers

Businesses that sell products they purchase from other businesses to customers.

Manufacturers

Businesses that change basic inputs into products that are sold to customers.

Accounting

An information system that provides reports to users about the economic activities and condition of a business.

Ethics

Moral principles that guide the conduct of individuals.

Generally Accepted Accounting Principles (GAAP)

The framework of accounting standards and rules that determine the accounting for individual business transactions in the United States.

Accounting Standards Codification

An electronic database maintained by the FASB that contains all the accounting standards that make up the GAAP.

Accounting Standards Updates

The mechanism used to make changes to the FASB Codification.

Securities and Exchange Commission (SEC)

An agency of the U.S. government that has authority over the accounting and financial disclosures for companies whose shares of ownership (stock) are traded and sold to the public.

Relevance

An essential characteristic of financial reports; information that has the potential to impact decision making.

Faithful Representation

An essential characteristic of financial reports; information that accurately reflects an entity’s economic activity or condition.

Comparability

An enhancement to relevance and faithful representation that includes consistent reporting and allows users to identify similarities and differences among reported items.

Verifiability

An enhancement to relevance and faithful representation that allows users to agree on the meaning of reported items.

Timeliness

An enhancement to relevance and faithful representation that requires distribution of financial reports in time to influence a user's decision.

Understandability

An enhancement to relevance and faithful representation that requires clean and concise financial reports to facilitate user interpretation and analysis.

Fiscal Year

The annual accounting period adopted by a company, normally starting on the 1st day of a month and ending on the last day of the following 12th month.

Natural Business Year

A fiscal year that ends when business activities have reached the lowest point in an annual operating cycle.

Proprietorship

A business owned by one individual, accounting for 70% of business entities in the United States; characterized as being easy and inexpensive to organize with resources limited to the owner.

Partnership

A business owned by 2 or more individuals, accounting for 10% of business organizations in the U.S. (combined with LLCs), which combines the skills and resources of more than 1 person.

Corporation

A separate legal taxable entity organized under state or federal statutes, generating 90% of business revenues; ownership is divided into shares called stock.

Limited Liability Company (LLC)

A form of business entity that combines the attributes of a partnership and a corporation, often used as an alternative to a partnership for its tax and legal liability advantages.

Enron

A company that fraudulently inflated its financial results, resulting in bankruptcy, criminal convictions for senior executives, and over $60 \text{ billion}$ in stock market losses.

Xerox Corporation

A company that recognized $3 \text{ billion}$ in sales prior to when they should have been recorded, resulting in a $10 \text{ million}$ fine to the SEC.

Wells Fargo

A company that improperly opened customer accounts without permission, resulting in the CEO being fined $17.5 \text{ million}$ and banned from the banking industry for life.