Financial accounting (chapter 1)

Accounting

The information system that measures business activities processes the information into reports and communicates the results to decision makers.

Financial accounting

The field of accounting that focuses on providing information for external decision makers.

(investors, creditors, regulators)

Managerial accounting

The field of accounting that focuses on providing information for internal decision makers.

(Managers)

Creditor

Any person or business to whom a business owes money.

Certified Public Accountant (CPA)

Licensed professional accountants who serve the general public

authorized to audit, Mandatory for public corporations, optional but helpful for everyone else.”

Chartered Global Management Accountant (CGMA)

Global professional accountant with advanced knowledge in finance, operations, strategy, and management.

Certified Managment Accountant (CMA)

Professional accountant who specializes in accounting and financial management knowledge.

focuses on internal business operations and strategy.

help grow you business

Certified Financial Planner (CFP)

Certified professional who specializes in budgeting, planning for retirement, and managing finances.

Personal financial planning for individuals

Data analytics

The process of examining data, identifying trends, and drawing conclusions.

Data visualizations

The representation of data, trends, and conclusions in a graphical format.

Financial Accounting Standards Board (FASB)

The private organization that oversees the creation and governance of accounting standards in the United States.

Securities and Exchange Commission (SEC)

U.S governmental agency that oversees the U.S financial markets and public company, taking legal action if necessary.

Generally Accepted Accounting Principles (GAAP)

Accounting guidelines, currently formulated by the Financial Accounting Standards Board (FASB); the main U.S accounting rule book.

International Financial Reporting Standards (IFRS)

A set of global accounting guidlines, formulated by the International Accounting Standards Board (IASB)

International Accounting Standards Board (IASB)

The private organization that oversees the creation and governance of (IFRS)

Faithful Representation

ensures providing information is complete, neutral, and free from error.

Economic entity Assumption

An organization that stands apart as a separate economic unit

(business’s financial records be kept separate from those of its owners.)

• The company’s financial records include only business activities

• Personal transactions are NOT included

Sole proprietorship

A business with a single owner and personal liability

Partnership

A business with two or more owners and not organized as a corporation (personal liability)

Corporation

A business organized under state law that is a separate legal entity, owned by shareholders.

Limited Liability Company (LLC)

A company in which each member is only liable for his or her own actions

offers limited liability to members unless at fault, protecting others not at fault)

Stockholders

A person who owns stock in a corporation

Cost principle

A principle that states that acquired assets and services should be recorded at their historical cost and not fair value

Fair value

Represents the price that would be received if the asset was sold today.

“Current market value”

Going concern assumption

Assumes that the entity will remain in operation for the foreseeable future.

and does not plan to liquidate or shut down.

Monetary Unit Assumption

The Assumption that requires the items on the financial statements to be measured in terms of a monetary unit.

using a stable currency (U.S dollar)

Audit

An examination of a company's financial statements and records

Sarbanes-Oxley Act

Requires companies to review internal control and take responsibility for the accuracy and completeness of their financial reports.

enforces compliance and penalties for fraud

Public Company Accounting Oversight Board (PCAOB)

U.S body that monitors the work of independent accountants who audit public companies.

Accounting Equation

measures the resources of the business and the claims to those resources.

Asset

economic resources that are expected to benefit the business in the future and something the business owns or has control of.

Liabilities

debts that are owed to creditors

Equity

the owners claims to the assets of a business

Contributed capital

owners contributions to a corporation (buying stock)

Common stock

represents the basic ownership of a corporation

Dividends

A distribution of a corporations earnings to stockholders.

Revenues

amounts earned from delivering goods or services to customers

Expenses

the costs of selling goods or services

Net income

the result of operations that occurs when total revenues are greater than total expenses 

Net loss

the result of operations that occurs when total expenses are greater than total revenues

transaction

an event that affects the financial position of the business and can be measured with faithful representation

Accounts payable

A short-term liability that will be paid in the future

Accounts receivable 

the right to receive cash in the future from customers for goods sold or for service preformed.

Financial statements

business documents that are used to communicate information needed to make business decisions.

Income statement

reports the net income or net loss of the business for a specific period of time.

Statement of retained earnings

reports how the companies retained earnings balance changed for a specific period of time (jan- to feb)

snapshot of retained earnings change

Statement of stockholders equity

reports the change in the equity of the business, including contributed capital (common stock) and retained earning, for a specific period of time

tracks all equity accounts

Balance sheet

reports on the assets, liabilities, and stockholders equity of the business as of a specific date

(jan-feb).

snapshot of current state

Statement of cash flows

reports in a business’ cash receipts and cash payments for a specific period of time

purpose: to understand cash position and liquidity.

Return on assets

measures how profitably a company uses its assets. Net income / Average total assets

Entity Concept

the business is treated as separate from its owner

Stakeholders

anyone with an interest in the business (owners, creditors, employees)