Principles of Accounting I - Chapter I.I

what is accounting?

the process of organizing, analyzing, and communicating financial information used for decision-making.

what is account often called?

the language of business.

what are the two categories of decisions that rely on accounting information?

personal decisions and business decisions.

give an example of a personal decision that blends financial and nonfinancial information.

lease versus buy a vehicle.

give an example of a business decision that blends financial and nonfinancial information.

whether to pay an employee to be “on call” for emergencies.

who is the audience for financial accounting?

external stakeholders.

what are some examples of external stakeholders?

owners, stockholders, lenders, SEC, IRS.

who is the audience for managerial accounting?

internal decision-makers.

what are some examples of internal decision-makers?

managers, executives.

what is the purpose of financial accounting?

measure financial performance using standard conventions.

what is the purpose of managerial accounting?

set and evaluate business goals.

which type of accounting has heavy regulatory oversight?

financial accounting.

what is financial accounting governed by?

sec, fasb, aicpa, pcaob.

give examples of financial accounting reports.

annual reports, income statements, balance sheets.

give examples of managerial accounting tasks.

budgeting, pricing, production cost analysis, scrap reduction.

what does sec stand for?

securities and exchange commission.

what does fasb stand for?

financial accounting standards board.

what does aicpa stand for?

american institute of certified public accountants.

what does pcaob stand for?

public company accounting oversight board.

what law created the pcaob?

the sarbanes-oxley act of 2002.

why was the pcaob created?

it was created after major corporate fraud scandals.

why do financial accounting oversight bodies exist?

to protect people outside the organization who rely on its financial information.

why do accountants need certification and continuing education? (3 reasons)

(1) protects the public / ensures minimum competence, (2) keeps skills current as laws and standards change, (3) builds trust with investors and lenders.

what does a cpa certification signal?

that the person has mastered a body of knowledge.

name three other professions that require significant expertise investment.

lawyers (law school + bar exam + CLE), engineers (accreditation + licensing), pilots (flight hours + certifications + recurrent training).

what is the accounting equation?

assets = liabilities + equity

define assets.

what a company owns.

define liabilities.

what a company owes.

define equity.

the owner’s claim on assets after liabilities are paid.

what is the foundation of double-entry bookkeeping?

every transaction affects at least two accounts, keeping the equation balanced.

what does the income statement show?

revenue - expenses = net income (profitability over a period).

what does the statement of retained earnings show?

how net income and dividends change retained earnings over time.

what does the balance sheet show?

assets, liabilities, and equity at a specific point in time.