ACCT CH.1 NOTES

Why is accounting important?

It is a system used to identify, record, and communicate business activities, improving decision making.

Who are external users of accounting information?

Lenders, shareholders, and suppliers who have limited access to accounting information.

What is financial accounting?

Accounting that focuses on the needs of external users.

What is managerial accounting?

Accounting that focuses on the needs of internal users.

What are some opportunities available in accounting?

Financial, managerial, taxation, accounting-related, data analytics, and data visualization.

What is ethics in accounting?

Ethics separate right from wrong and guide decision making.

What is the Fraud Triangle?

A model consisting of opportunity, pressure, and rationalization, which leads to fraud.

What is GAAP?

Generally Accepted Accounting Principles that ensure information is relevant and accurate.

What is the objective of the conceptual framework?

To provide information useful to investors and creditors.

What is the going-concern assumption?

The assumption that a company will stay in business in the future.

What does the measurement principle state?

Accounting information is based on the authentic cost.

What is the revenue recognition principle?

Revenue is recognized when a good or service is provided to a customer.

What is an asset?

Resources a company owns or controls.

What are liabilities?

Obligations a business owes to another entity.

What is equity?

The amount owned or capital invested into the company by the owner.

What is an income statement?

It describes a company's revenues and expenses over a period.

What is a statement of retained earnings?

It explains changes in retained earnings from net income and dividends over time.

What is a balance sheet?

It describes a company's financial position, including types and amounts of assets, liabilities, and equity.

What is return on assets (ROA)?

A measure used to evaluate if management is effectively using assets to generate net income.

Objectives of Conceptual Framework

Provide information useful to investors, creditors, and other users.

Qualitative Characteristics

Require information that is both relevant and faithfully represented.

Elements

Define items that are included in financial statements.

Measurement Onmeasurement

Sets criteria for how an item is recognized as an element and how to measure it.

Measurement Principle (Cost Principle)

Accounting info is based on the authentic cost, not what it could or should be.

Revenue Recognition Principle

Revenue is recognized as soon as a good or service is given to a customer, unless it's a credit sale.

Expense Recognition Principle (Matching Principle)

A company keeps track of expenses needed to create and sell the product or service.

Full Disclosure Principle

Companies report all financial statements that may impact user decisions.

Going-Concern Assumption

Assuming a company will stay in business in the future.

Monetary Unit Assumption

Transactions and events expressed in money or units.

Time Period Assumption

Company life can be divided into time periods.

Business Entity Assumption

A business is separate from its owner.

Ethical Decision Making Steps

1. Identify ethical concerns. 2. Analyze options. 3. Make an ethical decision.

Assets Formula

Assets = Liabilities + Equity (Detailed: Assets = Liabilities + Common Stock - Dividends + Revenues - Expenses)

Constraints

Information disclosed must have benefits that outweigh the negatives for the user.