Chapter 1: Accounting in Business (McGraw Hill 2025)

A comprehensive set of practice flashcards covering Chapter 1 topics: purpose and users of accounting, ethics and GAAP, the accounting equation, fundamental principles, transaction analysis, financial statements, and ROA.

Why is accounting called the language of business?

Because it communicates data to help external and internal users make better decisions.

Who are external users of accounting information?

Shareholders, lenders, external auditors, nonmanagerial employees, and regulators.

Who are internal users of accounting information?

Purchasing managers, human resource managers, production managers, research and development managers, and marketing managers.

What is the role of Artificial Intelligence (AI) in accounting?

AI can automate repetitive tasks; accountants develop AI systems and analyze reports; accounting careers are in strong demand.

What are the four basic types of analytics in data analytics?

Descriptive, Diagnostic, Predictive, and Prescriptive analytics.

What is data visualization in accounting?

A graphical presentation of data to help understand significance; Tableau dashboards are a common tool.

What is ethics in accounting?

Beliefs that separate right from wrong; trusted information requires ethics and accepted standards of behavior.

What is the Fraud Triangle?

Three factors that exist for fraud: opportunity, pressure, and rationalization.

What does GAAP stand for and what does it aim for?

Generally Accepted Accounting Principles; aims for information that is relevant and faithfully represented.

Who sets GAAP and who oversees it?

FASB sets GAAP; the SEC oversees GAAP compliance for public companies.

What is IFRS and who issues it?

International Financial Reporting Standards issued by the IASB; standards aim for global comparability with US GAAP, with ongoing convergence.

What is the Conceptual Framework in accounting?

A structure that outlines objectives, qualitative characteristics, elements, and recognition/measurement criteria for financial reporting.

What is the Cost (Measurement) Principle?

Accounting information is based on actual cost and is considered objective.

What is the Revenue Recognition Principle?

Revenue is recognized when goods or services are provided and when collection is reasonably assured.

What is the Matching (Expense Recognition) Principle?

Expenses are recognized in the same period as the revenues they help generate.

What is the Full Disclosure Principle?

Details behind financial statements are disclosed in notes that could influence user decisions.

What are the Going-Concern, Monetary Unit, Time Period, and Business Entity assumptions?

Going-Concern: business will continue; Monetary Unit: transactions in monetary terms; Time Period: life of the company divided into periods; Business Entity: business is separate from its owner.

What are the major attributes of Sole Proprietorships, Partnerships, Corporations, and LLCs?

1 owner (sole proprietorship) or 2+ (partnership) or 1+ shareholders (corporation) or members (LLC); differences in taxation, liability, and legal entity.

What is the Cost-Benefit constraint in accounting disclosures?

Information disclosed must provide benefits to users greater than the cost of providing it.

What is Materiality in accounting?

Information should be disclosed if its omission or misstatement could influence decisions.

What is Conservatism in accounting?

A constraint that leads to cautious reporting, often recognizing expenses and liabilities sooner.

What is the basic Accounting Equation?

Assets $ = $ Liabilities $ + $ Equity.

What is the Expanded Accounting Equation?

An expanded form showing how equity components (e.g., Common Stock, Retained Earnings) are affected by revenues, expenses, and dividends.

What are the four basic financial statements and their purpose?

Income Statement (revenues and expenses; net income over a period), Statement of Retained Earnings (retained earnings changes), Balance Sheet (assets, liabilities, equity at a point in time), and Statement of Cash Flows (cash inflows/outflows by operating, investing, financing).

What is net income?

Revenues minus expenses.

What is a Balance Sheet?

Describes a company’s financial position at a point in time: assets, liabilities, and equity.

What is the Income Statement layout?

Revenues minus Expenses equals Net Income (or Loss).

What is Return on Assets (ROA) and how is it calculated?

ROA is net income divided by average total assets.

What does ESG stand for and relate to in this context?

Environmental, Social, and Governance; relates to reporting and analysis of a company’s responsible practices (not a core accounting equation concept).

What are assets in accounting?

Resources a company owns or controls that are expected to yield future benefits. Examples include cash, accounts receivable, supplies, equipment, and land.

What does 'accounts receivable' signify?

An asset that promises a future inflow of resources, particularly when a company provides a service or product on credit.

What are liabilities in accounting?

Creditors’ claims on assets, representing company obligations to provide assets, products, or services to others. Examples include wages payable, accounts payable, and notes payable.

What does 'accounts payable' signify?

A liability that promises a future outflow of resources, typically for goods or services received on credit.

What is equity in accounting, and by what other names is it known?

The owner’s claim on assets, calculated as assets minus liabilities. It is also referred to as net assets or residual equity.

What are the four main components that affect equity?

Common Stock, Dividends, Revenues, and Expenses.

How do Common Stock contributions affect equity?

Common Stock reflects inflows of cash and other net assets from shareholders in exchange for stock, which increases equity.

How do Dividends affect equity?

Dividends are outflows of cash and other assets to shareholders that reduce equity.

How do Revenues affect equity?

Revenues increase equity (through net income) from the sales of products and services to customers.

How do Expenses affect equity?

Expenses decrease equity (through net income) from the costs of providing products and services to customers.