Introduction to Financial Accounting and Financial Statements

Flashcards covering the fundamentals of introductory financial accounting, forms of business organization, users of financial information, accounting standards (GAAP, IFRS, ASPE), the accounting process, and primary financial statements.

Internal Users

Users within an organization who manage the business, non-profit, or government organization, such as personnel in finance, marketing, human resources, and production.

External Users

Individuals or entities who do not work for the company, including investors and creditors.

Proprietorship

A business owned by one person, featuring simple setup, unlimited liability, and a limited organizational life.

Partnership

A business organization owned by two or more partners, similar to a proprietorship with unlimited liability.

Corporation

A business owned by one or more shareholders that may be public or private, having an indefinite life, ease of raising capital, and limited liability for owners.

Ethical Behavior

Actions and business conduct that are legal and adhere to moral standards.

GAAP

Generally Accepted Accounting Principles; the common set of accounting standards, rules, and procedures recognized for financial reporting.

IFRS

International Financial Reporting Standards; globally accepted accounting principles primarily used by publicly accountable enterprises.

ASPE

Accounting Standards for Private Enterprises; accounting framework designed specifically for private enterprises.

Financing Activities

Business activities that involve financial inflows and outflows, including raising equity and borrowing funds.

Investing Activities

Business activities that involve the purchase and disposal of long-term assets, such as property, plant, and equipment (PPE).

Operating Activities

Core ongoing business activities involving day-to-day transactions, expenses, revenues, and payments on payables.

Accounting Process

A sequential four-step cycle: 1. Analyze each transaction to find effect, 2. Record transaction in journal entry, 3. Transfer journal entry to accounts in ledger, and 4. Prepare trial balance.

T-Account

A standard visual accounting representation displaying the title of the account, a debit ($\text{Dr}$) side on the left, a credit ($\text{Cr}$) side on the right, and the normal balance.

Adjusting Entries

Accounting entries made at the end of an accounting period to bring accounts up to date, specifically including prepaids, accruals, and estimates.

Gross Profit

The profit earned before deducting operating expenses, calculated as $\text{Sales} - \text{Cost of Goods Sold}$.

FIFO

First In, First Out; an inventory cost flow method assuming that the oldest goods purchased are the first ones sold.

Cost of Goods Available for Sale

The total inventory value calculated as $\text{Cost of Goods Bought} + \text{Beginning Inventory}$, which is allocated between goods sold on the income statement and ending inventory on the balance sheet.

Income Statement

A financial statement that presents revenues and expenses for a specific period of time to calculate net income or net loss.

Statement of Changes in Equity

A financial statement reporting the changes in each component of shareholders' equity during a specified period of time.

Statement of Financial Position

A financial statement that shows a company's assets, liabilities, and shareholders' equity at a specific point in time ($\text{Assets} = \text{Liabilities} + \text{Shareholders' Equity}$).

Statement of Cash Flows

A financial statement that shows for a specific period of time how a company generated cash and how that cash was used.

Order of Preparation of Financial Statements

The required sequence for generating financial reports: 1. Income Statement, 2. Statement of Changes in Equity, 3. Statement of Financial Position, and 4. Statement of Cash Flows.

Revenues

Economic benefits arising from the sale of goods or the performance of services in the course of ordinary business operations.

Expenses

The costs of assets consumed or services used in the process of generating revenues.

Net Income

The net earnings resulting when revenues exceed expenses, calculated as $\text{Net Income} = \text{Revenues} - \text{Expenses}$.