Financial Accounting - Chapter 1: Introducing Accounting in Business

Vocabulary flashcards covering key definitions, principles, assumptions, equations, and statements from Chapter 1 of Financial Accounting.

Accounting

A system that identifies, records, and communicates relevant, reliable, and comparable information about an organization's business activities.

Accounting Activities

The three core steps performed in accounting: identifying business activities, recording business activities, and communicating business activities.

External Users

Users of accounting information who are not directly involved in running the organization, including lenders, shareholders, governments, consumer groups, external auditors, and customers.

Internal Users

Users of accounting information directly involved in managing and operating an organization, including managers, officers, internal auditors, sales staff, budget officers, and controllers.

Financial Accounting

The area of accounting that provides external users, such as shareholders and lenders, with financial statements.

Managerial Accounting

The area of accounting that serves the information needs of internal decision makers, such as managers and officers.

Ethics

Beliefs that distinguish right from wrong, forming accepted standards of good and bad behavior.

Generally Accepted Accounting Principles (GAAP)

The concepts and rules that govern financial accounting practice to ensure financial information is relevant, reliable, and comparable.

Securities and Exchange Commission (SEC)

The U.S. government agency that has legal authority to establish reporting requirements and set GAAP for companies issuing stock to the public.

Financial Accounting Standards Board (FASB)

The private group in the United States that sets both broad and specific generally accepted accounting principles (GAAP).

International Accounting Standards Board (IASB)

An independent international body that issues International Financial Reporting Standards (IFRS) identifying preferred accounting practices globally.

Measurement Principle

An accounting principle (also called the cost principle) prescribing that accounting information is based on actual cost incurred in business transactions.

Going-Concern Assumption

An accounting assumption reflecting a presumption that the business will continue operating rather than being closed or sold.

Monetary Unit Assumption

An accounting assumption that transactions and events can be expressed in money or monetary units.

Revenue Recognition Principle

An accounting rule providing guidance on when a company must recognize revenue, requiring revenue to be recognized when earned.

Business Entity Assumption

An accounting rule requiring a business to be accounted for separately from its owner or other business entities.

Matching Principle

The expense recognition principle prescribing that a company must record its expenses incurred to generate the revenue reported in the same period.

Full Disclosure Principle

An accounting principle requiring a company to report the details behind financial statements that would impact users' decisions.

Time Period Assumption

An accounting assumption presuming that the life of a company can be divided into distinct time periods, such as months and years.

Sarbanes-Oxley Act (SOX)

Law passed by Congress in 2002 to curb financial abuses at public companies by requiring accounting oversight, stringent internal controls, and increased accountability.

Accounting Equation

The mathematical equality expressing a company's financial balance: $\text{Assets} = \text{Liabilities} + \text{Equity}$.

Assets

Resources owned or controlled by a company that are expected to yield future benefits, such as cash, supplies, equipment, land, and buildings.

Liabilities

Creditors' claims on assets, representing obligations or debts owed by a company such as accounts payable and notes payable.

Equity

The owner's claim on assets, representing the residual interest in assets after deducting liabilities.

Expanded Accounting Equation

The full expression of the accounting equation incorporating equity components: $\text{Assets} = \text{Liabilities} + \text{Contributed Capital} - \text{Dividends} + \text{Revenues} - \text{Expenses}$.

External Transactions

Exchanges of value between two separate entities that yield changes in the accounting equation.

Internal Transactions

Exchanges within an entity that do not involve outside parties but affect its accounting equation.

Events

Happenings that affect an entity's accounting equation and can be reliably measured.

Transaction Analysis

The process used to analyze business transactions and events to determine their impact on the accounting equation.

Income Statement

A financial statement describing a company's revenues and expenses along with the resulting net income or loss over a period of time.

Statement of Retained Earnings

A financial statement reporting changes in retained earnings over a period of time, adding net income and subtracting dividends.

Balance Sheet

A financial statement describing a company's financial position (assets, liabilities, and equity) at a specific point in time.

Statement of Cash Flows

A financial statement identifying cash inflows and cash outflows over a period of time, categorized by operating, investing, and financing activities.

Return on Assets (ROA)

A profitability ratio computed as $\text{Return on Assets} = \frac{\text{Net Income}}{\text{Average Total Assets}}$.