Accounting Fundamentals: Uses, Forms, Activities, and Statements

A comprehensive set of Q&A flashcards covering the key concepts from the Accounting Fundamentals lecture notes.

What is accounting?

An information system that identifies, records, and communicates the economic events of an organization to interested users; often called the language of business.

What is the primary purpose of accounting?

To provide useful information for decision-making by existing and potential investors, lenders, and other creditors.

Who are internal users of accounting information?

Individuals who manage companies or organizations and use detailed internal accounting information.

Who are examples of internal users?

Senior management, managers in finance, marketing, human resources, and production, and board directors.

Who are external users of accounting information?

Individuals or organizations outside the company who access accounting information that is publicly available.

Who are the primary external users of accounting information and why do they use it?

Investors use information to buy, hold, or sell ownership interests in the company.

Who are other external users of accounting information?

Customers, employees, labor unions, taxing authorities, and regulatory authorities.

What questions might external users ask about a company?

Should I invest in this company? Is the company earning satisfactory income? Will the company be able to repay loans and interest?

What is ethical behavior in accounting?

Preparers should maintain high ethical standards; actions should be legal, responsible, and in the organization's best interests.

What is data analytics?

The process of analyzing data using software and statistics to find patterns, correlations, trends, and insights to improve decision-making.

What are the four types of data analytics?

Descriptive, Diagnostic, Predictive, and Prescriptive.

What are the three common forms of business organization?

Proprietorship, Partnership, and Corporation.

What is a proprietorship?

Owned by one person; simple to set up; owner has unlimited liability; income taxed on owner's personal return; reporting entity concept.

What is the life and liability of a proprietorship?

Life is limited to the life of the owner; owner has unlimited personal liability for business debts.

What are examples of proprietorships?

Hair stylists, plumbers, mechanics, small-scale farms, and small retail stores.

What is the reporting entity concept for proprietorships?

Business records must be kept separate from the owner's personal activities.

What is a partnership?

Owned by more than one person; more complex than a proprietorship; profits shared; life is limited.

What is liability like in a partnership?

Each partner generally has unlimited liability for partnership debts; limited liability partnerships exist in some cases.

Who pays income tax in a partnership?

Individual partners on their personal income tax returns.

What are examples of partnerships?

Doctors, lawyers, accountants, architects (professional service businesses).

What is the reporting entity concept for partnerships?

Partnership records are kept separate from each partner's personal activities.

What is a corporation?

A separate legal entity owned by shareholders; has an indefinite life; allows easier capital raising; shareholders have limited liability.

How is income taxed in a corporation?

The corporation pays income tax on its profits; may have tax advantages and different treatment than individuals.

What is the reporting entity concept for corporations?

The company is a separate reporting entity from its owners.

What is the management structure of a corporation?

Shareholders elect a board of directors who set strategy and hire officers to manage the company.

What are the two types of corporations?

Public corporations and private corporations.

What characterizes a public corporation?

Shares are traded on stock exchanges; must make financial statements publicly available.

What characterizes a private corporation?

Shares are not publicly traded; usually fewer shareholders; not required to publish financial statements publicly.

What are the three main types of business activities?

Financing activities, investing activities, and operating activities.

What is financing activity?

Obtaining and repaying funds to finance operations; includes equity and debt financing and dividends; affects cash via inflows and outflows.

What is investing activity?

Purchase or sale of long-lived assets and investments not held for trading; affects cash via inflows and outflows.

What is operating activity?

Day-to-day activities that generate revenues and expenses; cash effects include receipts from customers and payments for expenses; aim for positive cash flow.

What are the four external financial statements?

Income statement, statement of changes in equity, balance sheet (statement of financial position), and statement of cash flows.

What is the order of preparation of financial statements?

1) Income statement, 2) Statement of Changes in Equity, 3) Statement of Financial Position, 4) Statement of Cash Flows.

What is the income statement also known as?

Also known as the statement of income, statement of earnings, or statement of profit and loss.

What are the key components of the income statement?

Revenues, expenses, income before income tax, income tax expense, and net income or net loss.

What is the formula for net income?

Net income = income before income tax minus income tax expense (or Revenues minus Expenses).

What is the statement of changes in equity?

Reports changes in each component of shareholders’ equity and total equity for a period, including share capital, retained earnings, and dividends.

What is share capital?

Amounts contributed by shareholders when shares were issued; may include common and preferred shares.

What are retained earnings?

Cumulative net income retained in the corporation minus dividends paid; deficit if losses exceed income.

What is the statement of financial position?

Reports what the company owns (assets), owes (liabilities), and shareholders’ equity at a point in time; assets = liabilities + shareholders’ equity.

What are current vs non-current assets?

Current assets are expected to be converted to cash within one year or operating cycle; non-current assets are long-term.

What are current vs non-current liabilities?

Current liabilities are obligations due within one year or an operating cycle; non-current payable after one year.

What is depreciation and amortization?

Depreciation allocates the cost of tangible assets; amortization allocates the cost of intangible assets; land is not depreciated; accumulated depreciation is a contra-asset; carrying amount = cost minus accumulated depreciation.

What is the purpose of the statement of cash flows?

Shows cash receipts and payments for a period, classified into operating, investing, and financing activities; indicates net change in cash.

What is the structure of the cash flows statement?

Three sections: Operating Activities, Investing Activities, Financing Activities.

What are the qualitative characteristics of useful financial information?

Fundamental qualities: relevance and faithful representation; Enhancing qualities: comparability, verifiability, timeliness, and understandability.

What is the cost constraint in accounting?

The benefits of financial reporting should outweigh the costs of providing and using it.

What is the going concern assumption?

The business is expected to continue operating in the foreseeable future, justifying accounting methods like historical cost.

What is GAAP in accounting?

Generally Accepted Accounting Principles; rules and practices for preparing financial statements; standards can be IFRS or ASPE depending on entity.

What is the difference between IFRS and ASPE?

IFRS is used by publicly traded companies; ASPE is used by many private enterprises; ASPE is typically less complex and costly.

What is revenue recognition principle?

Revenue is recognized when the service is performed or goods are delivered, regardless of when cash is received.

What is the purpose of notes to the financial statements?

Explanatory notes and schedules clarifying the statements and providing additional detail, including policies, risks, and contingencies.

What is MD&A in a public company annual report?

Management Discussion and Analysis; management's perspective on performance, financial condition, cash flows, and forward-looking factors.

What is an auditor’s report?

An independent opinion on whether the financial statements fairly present the company’s financial position and results according to applicable accounting principles (IFRS for public companies).