Financial Accounting - Chapter 1 Vocabulary

Vocabulary flashcards covering key terms, principles, formulas, and concepts from Chapter 1 of Financial Accounting.

Accounting

An information and measurement system that identifies, records, and communicates an organization's business activities.

External users

People not directly involved in running a company who have limited access to its accounting information, such as investors, lenders, regulators, and suppliers.

Financial accounting

The area of accounting that provides general-purpose financial statements to external users.

Internal users

People directly involved in managing and operating an organization, such as production, marketing, human resources, and service managers.

Managerial accounting

The area of accounting that serves the decision-making needs of internal users.

Internal reports

Reports designed to meet the specific needs of internal users.

Private accounting

Accounting work performed by employees of a business; it offers the largest number of accounting opportunities.

Public accounting

Accounting services provided to clients; common opportunities include auditing and taxation.

CPA

Certified Public Accountant.

CMA / CGMA

Certified Management Accountant / Chartered Global Management Accountant.

CIA

Certified Internal Auditor.

Data analytics

The process of analyzing data to identify meaningful relationships and trends.

Descriptive analytics

Summarizes and describes events from the past.

Diagnostic analytics

Reveals the causes of events from the past.

Predictive analytics

Predicts likely events in the future.

Prescriptive analytics

Creates action plans to achieve a desired future.

Data visualization

A graphical presentation of data that helps people understand its significance and make informed business decisions.

Ethics

Beliefs that separate right from wrong.

Fraud triangle

A model stating that three factors must exist for fraud: opportunity, pressure, and rationalization.

Internal controls

Procedures used to protect assets, ensure reliable accounting, promote efficiency, and uphold company policies.

GAAP

Generally Accepted Accounting Principles; concepts and rules that govern financial accounting in the United States.

FASB

Financial Accounting Standards Board; the organization responsible for setting U.S. GAAP.

SEC

Securities and Exchange Commission; gives FASB authority to set GAAP and oversees the proper use of GAAP.

IASB

International Accounting Standards Board; the organization that issues IFRS.

IFRS

International Financial Reporting Standards; global accounting standards that are similar to, but sometimes different from, U.S. GAAP.

Qualitative characteristics of accounting information

Relevance and faithful representation.

Measurement principle (cost principle)

Accounting information is based on the actual costs incurred in business transactions.

Objectivity

Accounting information is supported by independent, unbiased evidence.

Revenue recognition principle

Record revenue when goods or services are provided to customers and at the amount expected to be received.

Expense recognition principle (matching principle)

Record expenses in the period in which they are incurred to generate reported revenues.

Full disclosure principle

Report details that could affect users' decisions, often in notes to the financial statements.

Going-concern assumption

Assumes a business will continue operating instead of being closed or sold.

Monetary unit assumption

Requires transactions and events to be expressed in money units.

Time period assumption

Allows a company's life to be divided into reporting periods, such as months or years.

Business entity assumption

Requires a business to be accounted for separately from its owner and other businesses.

Sole proprietorship

A business owned by one person; it is not a separate legal entity, and the owner has unlimited personal liability.

Partnership

A business owned by two or more partners who generally have unlimited liability; owners pay personal income tax on their shares of net income.

Limited liability company (LLC)

A separate legal entity owned by one or more members who generally are not personally liable for its debts.

Corporation

A separate legal entity owned by shareholders; owners have limited liability, and the corporation pays business income tax.

Shareholders (stockholders)

Owners of a corporation.

Limited liability

Owners are generally not personally responsible for the business's debts.

Unlimited liability

Owners can be held personally responsible for the business's debts.

Cost-benefit constraint

The benefits of disclosing accounting information should be greater than the costs of providing it.

Materiality constraint

Information is material if it has the ability to influence users' decisions.

Basic accounting equation

$$\text{Assets} = \text{Liabilities} + \text{Equity}$$

Assets

Resources a company owns or controls that are expected to provide future benefits.

Liabilities

Creditors' claims on assets; obligations to transfer assets or provide products or services to others.

Equity

The owner's claim on assets; equal to assets minus liabilities. Also called net assets or residual equity.

Common stock

Cash or other net assets invested by shareholders in exchange for stock; it increases equity.

Revenue

Income earned from selling products or providing services; it increases equity through net income.

Expenses

Costs of assets or services used to earn revenue; they decrease equity through net income.

Dividends

Distributions of cash or other assets to shareholders; they decrease equity and are not expenses.

Expanded accounting equation

$$\text{Assets} = \text{Liabilities} + \text{Common Stock} - \text{Dividends} + \text{Revenues} - \text{Expenses}$$

Net income

The amount by which revenues exceed expenses; it increases equity.

Net loss

The amount by which expenses exceed revenues; it decreases equity.

Income statement

Reports revenues, expenses, and the resulting net income or net loss over a period of time.

Statement of retained earnings

Explains changes in retained earnings from net income or loss and dividends over a period of time.

Retained earnings

Cumulative net income minus dividends distributed to shareholders.

Balance sheet

Reports a company's assets, liabilities, and equity at a specific point in time.

Statement of cash flows

Reports cash inflows and cash outflows over a period of time.

ESG

Environmental, social, and governance; a framework describing how companies act as responsible environmental stewards, principled members of society, and accountable leaders.

Return on assets (ROA)

A profitability measure that shows how effectively a company uses its assets to generate net income; also called return on investment (ROI).

Return on assets formula

$$\text{ROA} = \frac{\text{Net Income}}{\text{Average Total Assets}}$$

Average total assets formula

$$\text{Average Total Assets} = \frac{\text{Beginning Total Assets} + \text{Ending Total Assets}}{2}$$