Accounting Principles and Financial Statements Flashcards

Flashcards for reviewing accounting principles and financial statements.

What is the primary purpose of accounting?

To identify, record, and communicate an organization's business activities.

Define external users of accounting information and provide examples.

Those not directly involved with running the company; examples include shareholders, lenders, and regulators.

What is the focus of financial accounting?

Serving external users by providing them with general-purpose financial statements.

Define internal users of accounting information and provide examples.

Those directly involved in managing and operating an organization; examples include research and development, purchasing, and marketing managers.

What is the focus of managerial accounting?

Serving the decision-making needs of internal users.

What are internal controls and their purpose?

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

Define GAAP.

Generally Accepted Accounting Principles; concepts and rules that govern financial accounting.

Who sets GAAP in the United States?

The Financial Accounting Standards Board (FASB), under the oversight of the Securities and Exchange Commission (SEC).

What are IFRS?

International Financial Reporting Standards issued by the International Accounting Standards Board (IASB).

What is the measurement principle (cost principle)?

Accounting information is based on actual costs incurred, measured on a cash or equal-to-cash basis. Information based on cost is considered objective.

Explain the revenue recognition principle.

Revenue is recognized when goods or services are provided to customers and at the amount expected to be received from the customer.

Explain the expense recognition principle (matching principle).

A company records expenses it incurred to generate revenues it reported.

What is the full disclosure principle?

A company records the details behind financial statements that would impact users’ decisions, often in footnotes to the statements.

What is the going-concern assumption?

Accounting information presumes that the business will continue operating instead of being closed or sold.

What is the monetary unit assumption?

Transactions and events are expressed in monetary, or money, units.

Describe the time period assumption.

The life of the company can be divided into time periods, such as months and years, and useful reports can be prepared for those periods.

Explain the business entity assumption.

A business is accounted for separately from other business entities and its owner.

What is a sole proprietorship?

A business owned by one person that has unlimited liability and is not a separate legal entity.

What is a partnership?

A business owned by two or more people, called partners, who are subject to unlimited liability. The business is not subject to an income tax, but the owners are responsible for personal income tax on their individual share of the net income of entity.

Describe a Limited Liability Company (LLC).

A business owned by one or more members that offers limited liability to the members who are not personally liable for the debts of the LLC, and is a separate entity with the same rights and responsibilities as a person.

What is a corporation?

A business that is a separate legal entity whose owners are called shareholders or stockholders. These owners have limited liability. The entity is responsible for a business income tax, and the owners are responsible for personal income tax on profits that are distributed to them in the form of dividends.

Explain the cost-benefit constraint.

Information disclosed by the entity must have benefits to the user that are greater than the costs of providing it.

What is the materiality constraint?

The ability of information to influence decisions.

State the accounting equation.

Assets = Liabilities + Equity

Define assets and provide examples.

Resources a company owns or controls that are expected to carry future benefits; examples include cash, accounts receivable, and equipment.

Define liabilities and provide examples.

Creditors’ claims on assets; examples include wages payable, accounts payable, and notes payable.

Define equity.

Owner’s claim on assets; assets minus liabilities. Also called net assets or residual equity. Increases in equity result from owner investments and revenues. Decreases results from dividends and expenses.

How do revenues and expenses impact equity?

Revenues increase equity, and expenses decrease equity.

What are the four financial statements?

Income Statement, Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows

What does the income statement describe?

A company’s net income or loss over a period of time.

What does the statement of retained earnings explain?

Changes in equity from net income (or loss), owner investments, and dividends over a period of time.

Define liquidity.

Ability to meet short-term obligations and generate revenues.

Define solvency.

Ability to meet long-term obligations and generate revenues.

Define profitability.

Ability to provide financial rewards to attract and retain financing.

What do source documents do?

Identify and describe transactions and events entering the accounting system.

What is an account?

A record of increases and decreases in a specific asset, liability, equity, revenue, or expense.

Define accounts receivable.

Promises of payment from customers.

Define prepaid accounts.

Assets from prepayments of future expenses expected to be incurred in future accounting periods.

Define accounts payable.

Promises to pay later, usually arising from purchase of inventory or other assets.

Define Notes Payable.

Written promissory note to pay a future amount.

Define Unearned revenue.

Revenue collected before it is earned/ before services or goods are provided.

Define Accrued liabilities.

Amounts owed that are not yet paid.

What is the ledger (general ledger)?

A collection of all accounts and their balances for an accounting system.

What is the chart of accounts?

A list of all accounts in the ledger with their identification numbers.

What is double-entry accounting?

A system where each transaction affects, and is recorded in, at least two accounts, and total debits must equal total credits for each transaction.

What is a T-account?

Represents a ledger account and is used to understand the effects of one or more transactions. It is shaped like the letter T with the account title on top.

What is a debit?

An entry on the left side of an account.

What is a credit?

An entry on the right side of an account.

What is the normal balance for assets?

Debit

What is the normal balance for liabilities and equity?

Credit

What is the normal balance for revenues?

Credit

What is the normal balance for dividends and expenses?

Debit

Describe the steps in processing transactions.

Identify transactions, analyze them using the accounting equation, record the journal entry, and post the entry to the ledger.

What is a general journal?

the most flexible type of journal because it can be used to record any type of transaction.

Define a journal entry.

When a transaction is recorded in the General Journal, it is called a journal entry. A journal entry that affects more than two accounts is called a compound journal entry.

What is the process of posting?

Transferring entries from the journal to the ledger.

What is a trial balance?

A list of all ledger accounts and their balances (either debit or credit) at a point in time.

What is the purpose of a trial balance?

Tests for the equality of the debit and credit account balances as required by double-entry accounting.

What is the time period principle?

assumes that an organization’s activities can be divided into specific time periods such as a month, a three-month quarter, a six-month interval, or a year for periodic reporting

What is the difference between a calendar year and a fiscal year?

A calendar year runs from January 1 to December 31, while a fiscal year is any twelve consecutive months.

What is the natural business year?

a fiscal year that ends when a company’s sales activities are at their lowest point.

What are interim financial statements?

statements prepared for any period less than a fiscal year.

Differentiate between accrual and cash basis accounting.

Accrual basis recognizes revenues when earned and expenses when incurred, while cash basis recognizes revenues when cash is received and expenses when cash is paid.

What is an adjusting entry?

recorded to bring an asset or liability account balance to its proper amount. This entry also updates the related expense or revenue account.

What are prepaid expenses?

items paid for in advance of receiving their benefits. Prepaid expenses, also called deferred expenses, are assets.

What is depreciation?

the process of allocating the cost of plant assets over their expected useful lives

What is accumulated depreciation?

A contra asset that is linked to the asset as a subtraction and thus used to record the declining asset balance.

What is book value?

asset less its contra asset (accumulated depreciation).

What are unearned revenues?

liabilities created by cash received in advance of providing products or services.

What are accrued expenses?

costs or expenses incurred in a period but are both unpaid and unrecorded.

Define accrued revenues.

revenues earned in a period that are both unrecorded and not yet received in cash.

What is an adjusted trial balance?

a list of accounts and balances prepared after adjusting entries are recorded and posted to the ledger.

What is the closing process?

occurs at the end of the accounting period after financial statements are completed.

What is the purpose of the closing process?

To reset revenues, expenses, and dividends account balances to zero at the end of every period to prepare these accounts for proper measurement in the next period and summarize a period’s revenue minus expenses.

What are temporary accounts?

relate to one accounting period and include all income statement, dividends, and Income Summary accounts.

What are permanent accounts?

report on activities related to one or more future accounting periods and include asset, liability, and equity accounts – all balance sheet accounts.

What does depletion refer to?

The process of allocating the cost of natural resources to the period when it is consumed

What does amortization refer to?

Process of systematically allocating cost of intangible asset to expense over its estimated useful or economic life.

What does Goodwill refer to?

the amount by which the value of a company exceeds the value of its individual assets and liabilities.