Chapter 1: Accounting Foundations and Financial Statements

Vocabulary practice flashcards covering fundamental accounting terms, user types, financial statement types, accounting standards bodies, GAAP principles, assumptions, constraints, ethics, and career paths based on Chapter 1 notes.

Accounting

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

Identifying (Accounting)

The process of selecting business transactions and events.

Recording (Accounting)

The process of inputting, measuring, and logging business transactions and events.

Communicating (Accounting)

The process of preparing, analyzing, and interpreting financial statement data and business activities.

External Users

Users of accounting information not directly involved in managing the business, including shareholders, lenders, external auditors, nonmanagerial employees, and regulators.

Internal Users

Users of accounting information directly involved in managing the business, including purchasing managers, human resource managers, production managers, research and development managers, and marketing managers.

Income Statement

A financial statement that describes a company's revenues and expenses and computes net income or loss over a period of time ($\text{Revenues} - \text{Expenses} = \text{Net Income}$).

Statement of Retained Earnings

A financial statement that explains changes in retained earnings from net income and any dividends over a period of time ($\text{Beginning Retained Earnings} + \text{Net Income} - \text{Dividends} = \text{Ending Retained Earnings}$).

Balance Sheet

A financial statement that describes a company's financial position (types and amounts of assets, liabilities, and equity) at a specific point in time ($\text{Assets} = \text{Liabilities} + \text{Equity}$).

Statement of Cash Flows

A financial statement that identifies cash inflows (receipts) and cash outflows (payments) over a period of time.

Generally Accepted Accounting Principles (GAAP)

Concepts and rules that govern financial accounting, aiming to ensure information has relevance and faithful representation.

Financial Accounting Standards Board (FASB)

An independent body that sets GAAP, operating under authority provided by the SEC.

Securities and Exchange Commission (SEC)

A U.S. government agency that oversees GAAP by companies that sell stock and debt to the public.

International Accounting Standards Board (IASB)

An international body that issues International Financial Reporting Standards (IFRS).

International Financial Reporting Standards (IFRS)

International accounting standards issued by the IASB that identify preferred accounting practices globally.

Specific Principles

Detailed rules used in reporting business transactions and events.

General Principles

The basic assumptions, concepts, and guidelines for preparing financial statements.

Measurement Principle (Cost Principle)

An accounting principle stating that accounting information is based on actual cost and is considered objective.

Revenue Recognition Principle

An accounting principle requiring revenue to be recognized when goods or services are provided to customers.

Going Concern Assumption

An accounting assumption that the business is presumed to continue operating instead of being closed or sold.

Monetary Unit Assumption

An accounting assumption that transactions and events are expressed in monetary, money, or units.

Time Period Assumption

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

Business Entity Assumption

An accounting assumption that a business is accounted for separately from other business entities, including its owner.

Cost-Benefit Constraint

An accounting constraint requiring that information disclosed must have benefits to the user greater than the cost of providing it.

Materiality Constraint

An accounting constraint stating that the ability of information to influence the decision of a user determines whether it needs to be disclosed.

Accounting Equation

The fundamental formula expressing the relationship between business resources and claims against them: $\text{Assets} = \text{Liabilities} + \text{Equity}$.

Assets

Things owned by a company that have economic value.

Liabilities

Amounts owed by a business to external parties.

Equity

The owner's claim on business assets, comprising stock and retained earnings.

Ethics

Beliefs that separate right from wrong, serving as accepted standards of good and bad behavior.

Fraud Triangle

A framework identifying three factors required for a person to commit fraud: opportunity, pressure, and rationalization.

Opportunity (Fraud Triangle)

The factor in fraud where an individual envisions a way to commit fraud with low risk of getting caught.

Pressure (Fraud Triangle)

The factor in fraud where an individual experiences incentive or stress to commit fraud, such as unpaid bills.

Rationalization (Fraud Triangle)

The factor in fraud where an individual fails to see the criminal nature of the fraud or mentally justifies their action.

Private Accounting

An accounting path where employees work directly for businesses, accounting for the majority of accounting opportunities.

Public Accounting

An accounting path involving accounting services offered to the public, such as auditing, taxation, and advisory services.