Fundamentals of Financial Accounting - Chapters 1 to 3

Vocabulary practice flashcards covering fundamental financial accounting concepts from Chapters 1, 2, and 3, including organizational forms, financial statements, transaction analysis, debits and credits, the accounting cycle, and revenue and expense recognition under Canadian GAAP (IFRS and ASPE).

Sole Proprietorship

A form of business owned by one individual where all profits (or losses) become a part of the taxable income of the owner, who is personally liable for all debts of the business.

Partnership

A form of business where the profits, taxes, and legal liability are the responsibility of two or more owners instead of just one.

Corporation

A form of business that is a separate entity from both a legal and accounting perspective, meaning the corporation, not its owners, is legally responsible for its own taxes and debts.

Limited Liability Partnership (LLP)

A specific form of business ownership in which partners enjoy limited liability for the partnership's debts.

Accounting System

A system designed to capture information about the operating, investing, and financing activities of a company so it can be reported to internal and external decision makers.

Managerial Accounting Reports

Internal financial reports, including detailed financial plans and operating performance evaluations, used by managers, supervisors, and other internal decision makers to run the company.

Financial Accounting Reports

Periodic external accounting reports (financial statements) provided to external users, such as creditors, investors, directors, and government agencies, to evaluate the company.

Basic Accounting Equation

The foundational mathematical relationship balancing resources owned and owed: $\text{Assets} = \text{Liabilities} + \text{Shareholders' Equity}$.

Asset

An economic resource presently controlled by the company that has measurable value and is expected to produce future cash inflows or reduce future cash outflows.

Liabilities

Measurable amounts that a company owes to creditors resulting from past transactions.

Shareholders' Equity

The owners' residual claims on a business, arising from direct contributions in exchange for shares (Contributed Capital) and accumulated retained profits (Retained Earnings).

Contributed Capital

The cumulative dollar amount contributed directly to the company by owners in exchange for its shares.

Retained Earnings

The cumulative amounts a company has earned through profitable business operations minus any distributions made to shareholders in the form of dividends.

Income Statement

The financial statement that measures operating performance over a specified accounting period by reporting revenues, expenses, and the resulting net income: $\text{Net Income} = \text{Revenues} - \text{Expenses}$.

Revenues

Amounts earned by a business by selling goods or providing services to customers.

Expenses

All the costs of doing business incurred and necessary to generate revenue during an accounting period.

Net Income

The excess of total revenues over total expenses for an accounting period, often called profit.

Statement of Retained Earnings

A financial statement showing the beginning retained earnings balance, adding current net income (or subtracting net loss), subtracting dividends, and arriving at the ending balance.

Balance Sheet

A financial report, also known as the Statement of Financial Position, that states the amounts of assets, liabilities, and shareholders' equity at a specific point in time.

Statement of Cash Flows

A financial report detailing the net change in cash over an accounting period by categorizing cash inflows and outflows into operating, investing, and financing activities.

Operating Activities (Cash Flows)

Cash inflows and outflows that arise directly from the primary day-to-day operations of running the business to earn profit.

Investing Activities (Cash Flows)

Cash flows arising from buying and selling productive long-lived resources, purchasing investment securities, and lending cash to other entities.

Financing Activities (Cash Flows)

Cash flows related to financing the company, including borrowing from banks, repaying bank loans, issuing shares to shareholders, and paying dividends.

Generally Accepted Accounting Principles (GAAP)

The underlying rules and standards that govern financial accounting and reporting in Canada, set under the authority of CPA Canada.

Accounting Standards Board (AcSB)

An independent Canadian body supported by CPA Canada that develops and establishes financial reporting standards using guidance from the International Accounting Standards Board (IASB).

International Financial Reporting Standards (IFRS)

Global accounting standards required in Canada for publicly accountable profit-oriented enterprises and optional for private enterprises.

Accounting Standards for Private Enterprises (ASPE)

A set of Canadian accounting standards created specifically for private enterprises that do not trade shares publicly and choose not to adopt IFRS.

Initial Public Offering (IPO)

The initial issuance of a company's shares to the public on a recognized stock exchange to raise broad external equity financing.

Transactions

Business activities that have a direct financial effect on the basic accounting equation ($\text{Assets} = \text{Liabilities} + \text{Shareholders' Equity}$).

External Exchanges

Transactions involving exchanges of assets, liabilities, or shareholders' equity between the business enterprise and an outside party.

Internal Events

Business events occurring exclusively inside a company that affect the accounting equation, such as using raw materials and assets to manufacture inventory.

Accounting Cycle

A recurring 5-step sequence used by businesses to capture and report the financial effects of transactions: 1) Analyze, 2) Record, 3) Summarize, 4) Prepare Trial Balance, and 5) Report Financial Statements.

Duality of Effects

The fundamental concept that every transaction affects at least two accounts in the accounting equation, preserving the equality of total assets to total liabilities plus equity.

Chart of Accounts

A designated index of account titles and corresponding reference numbers created by a company to organize and classify its financial records.

Debit (dr)

The left side of any ledger or T-account; debits increase asset accounts and decrease liability and shareholders' equity accounts.

Credit (cr)

The right side of any ledger or T-account; credits increase liability and shareholders' equity accounts and decrease asset accounts.

Normal Balance

The side of an account (debit or credit) where increases are recorded; assets hold a normal debit balance, whereas liabilities and shareholders' equity hold normal credit balances.

Journal Entry

A formal accounting record of a transaction specifying the date, the accounts debited and credited (with equal dollar amounts), reference codes, and a brief explanation.

Posting

The administrative process of transferring transaction debit and credit dollar amounts from general journal entries into specific general ledger accounts.

T-Account

A simplified pedagogical visual tool representing a ledger account, formatted in the shape of a 'T' with debits on the left, credits on the right, and a calculated ending balance.

Trial Balance

An internal summary listing all general ledger account names alongside their debit or credit ending balances to verify that total debits equal total credits.

Classified Balance Sheet

A balance sheet structured to distinguish current assets and current liabilities from their non-current (long-term) counterparts.

Current Ratio

A key short-term liquidity metric defined as $\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}$, assessing whether current assets suffice to pay off current obligations.

Cost Principle

The measurement guideline establishing that assets and liabilities are originally recorded at their cash-equivalent historical acquisition cost on the transaction date.

Operating Cycle

The circular period in which a business buys goods and services from suppliers, pays cash, sells products or services to customers, and collects cash.

Cash Basis Accounting

An accounting method that recognizes revenues when cash is collected and expenses when cash is paid out; not permitted under ASPE or IFRS for external reporting.

Accrual Basis Accounting

The standard accounting approach that reports revenues when earned and expenses when incurred, regardless of the timing of actual cash receipts or disbursements.

Rule of Accrual

The core doctrine stating that financial impacts of business events are recorded and recognized in the period the activities take place rather than when cash exchanges occur.

Revenue Recognition Principle

The accrual principle dictating that revenues are recognized when earned, requiring that risks and rewards have transferred, measurability is reasonably certain, and collection is reasonably assured.

Expense Recognition Principle (Matching)

The accounting rule requiring expenses to be recognized in the identical accounting period as the revenues they helped generate.

Deferred Revenue

A liability account representing customer payments received in advance of the company delivering goods or performing services.

Net Profit Margin

A financial performance ratio defined as $\text{Net Profit Margin} = \frac{\text{Net Income}}{\text{Total Revenue}}$, evaluating the fraction of profit earned on each dollar of revenue generated.