Chapter 1: The Framework for Financial Accounting

Vocabulary flashcards covering key concepts from Chapter 1 notes.

Financial accounting

Accounting information provided to external users and the focus of this chapter; used to measure and communicate a company’s activities.

External users

Investors, creditors, and other parties outside the company who rely on financial information to make decisions.

Measurement

The process of determining the amount of business activities to report.

Communication

Conveying the measured information to external parties to aid decision making.

Assets

Resources owned by the company that will provide future economic benefits.

Liabilities

Obligations to creditors; amounts the company owes.

Stockholders’ equity

Owners’ claims to resources; equals common stock plus retained earnings.

Accounting equation

Assets = Liabilities + Stockholders’ Equity; the fundamental model of a company’s financial position.

Revenues

Amounts recognized when the company sells products or provides services to customers.

Expenses

Costs of providing products/services and other activities during the current period.

Net income

Revenues minus expenses; also known as earnings or profit.

Dividends

Cash payments to stockholders; not considered an expense.

Income statement

Financial statement that reports revenues and expenses over a period, resulting in net income or net loss.

Balance sheet

Financial position on a specific date; lists assets, liabilities, and stockholders’ equity.

Statement of cash flows

Measures cash receipts and payments over a period; divided into operating, investing, and financing activities.

Statement of stockholders’ equity

Shows changes in common stock and retained earnings over a period.

Common stock

Capital contributed by stockholders; part of stockholders’ equity.

Retained earnings

Accumulated net income minus dividends; component of stockholders’ equity.

Primary financial statements

The main financial statements: income statement, balance sheet, statement of stockholders’ equity, and statement of cash flows.

GAAP

Generally Accepted Accounting Principles; the rules governing financial reporting in the United States.

FASB

Financial Accounting Standards Board; the independent body that establishes GAAP in the U.S.

IASB

International Accounting Standards Board; develops international accounting standards.

Auditors

Independent professionals who attest that financial statements comply with GAAP and are free of material misstatement.

MD&A

Management’s Discussion and Analysis; section with management’s views on events, trends, and uncertainties.

Note disclosures

Notes to the financial statements that provide additional information or explanations.

Conceptual framework

A framework established by the FASB to guide the development and interpretation of accounting standards.

Relevance

A fundamental qualitative characteristic; information that helps users make decisions.

Faithful representation

A fundamental qualitative characteristic; information that faithfully reflects economic phenomena.

Comparability

An enhancing qualitative characteristic; information that enables comparisons across time or entities.

Verifiability

An enhancing qualitative characteristic; evidence that information faithfully represents underlying events.

Timeliness

An enhancing qualitative characteristic; information available early enough to influence decisions.

Understandability

An enhancing qualitative characteristic; information that is clear and comprehensible to users with reasonable knowledge.

Economic entity

An assumption that the activities of the entity are separate from its owners.

Monetary unit

An assumption that financial information is measured in a stable monetary unit (e.g., the dollar).

Periodicity

An assumption that the economic life of a business can be divided into artificial time periods for reporting.

Going concern

An assumption that the company will continue to operate for the foreseeable future.

Financing activities

Cash flows related to obtaining or repaying capital from investors and creditors.

Investing activities

Cash flows from purchasing or selling long-term assets and investments.

Operating activities

Cash flows from the core operations of the business, including revenues and expenses.

Corporation

A legally separate entity whose owners have limited liability.

Sole proprietorship

A business owned by one person; owner bears liability.

Partnership

A business owned by two or more persons; typically involves shared liability.

Limited liability

Liability of owners is limited to their investment; typical of corporations.

Revenue recognition

Revenues are recognized when the company sells products or provides services to customers.