A Framework for Financial Accounting - Chapter 1

Flashcards covering core concepts from Chapter 1: framework, accounting equation, financial statements, GAAP, auditors, and related topics.

What is the difference between managerial accounting and financial accounting?

Managerial accounting provides information for internal users; financial accounting provides information for external users.

In the framework for financial accounting, what two questions should you consider about business activity?

How is the business activity measured? How is the business activity communicated?

What is the accounting equation?

Assets = Liabilities + Stockholders’ Equity.

What are assets?

Resources of the company; items of value expected to provide future economic benefits.

What are liabilities?

Creditors’ claims to resources; obligations the company owes to creditors.

What is stockholders’ equity?

Owners’ claims to resources; residual interest after liabilities.

How is profit defined in this framework?

Profit = Revenues − Expenses; often called net income.

What are revenues?

Sales of products or services to customers.

What are expenses?

Costs of selling products or services.

What are dividends?

Distribution of profit to stockholders.

What is the measurement role of accounting?

To create a record of a company’s activities and maintain accurate records of assets, liabilities, stockholders’ equity, revenues, expenses, and dividends.

Name the three common business structures.

Sole proprietorship, Partnership, Corporation (with limited liability for stockholders).

What are financing activities?

Transactions the company has with investors and creditors.

What are investing activities?

Transactions involving the purchase and sale of resources that provide benefit for several years.

What are operating activities?

Transactions that relate to the primary operations of the company.

What are the primary financial statements?

Income statement, Statement of stockholders’ equity, Balance sheet, and Statement of cash flows.

What does Eagle Golf Academy’s income statement show for the month ended December 31?

Revenues 7,200; Expenses 6,000; Net income 1,200.

What does the statement of stockholders’ equity include?

Beginning balance, Issuances, Net income, Dividends, Ending balance; shows common stock and retained earnings as components.

What are the main sections of a balance sheet?

Assets; Liabilities; Stockholders’ Equity; with Total assets = Total liabilities + Total stockholders’ equity.

What are the three sections of the statement of cash flows?

Operating activities, Investing activities, Financing activities.

Give an example of a financing activity shown in Eagle Golf Academy’s cash flows.

Issuing common stock (also borrowing or paying dividends).

What does GAAP stand for?

Generally Accepted Accounting Principles.

Who has primary responsibility for establishing GAAP in the United States?

The Financial Accounting Standards Board (FASB).

What is the role of auditors?

Provide an independent opinion that financial statements conform to GAAP and add credibility.

What are the GAAP underlying assumptions?

Economic entity, Monetary unit, Periodicity, Going concern.