Comprehensive Financial Accounting and Internal Controls Study Guide

Vocabulary flashcards covering core accounting concepts, standard setting, accounting equation, transaction analysis, debit/credit rules, the accounting cycle, financial statements, internal controls, and cash management across Chapters 1-4.

Financial Accounting

The branch of accounting focused on measuring business activities of a company and communicating those measurements to external decision makers.

Operating Activities

Business transactions related to the primary operations of a company, such as providing goods or services to customers and paying associated operational costs.

Accounting Equation

The fundamental formula showing that total company resources equal total claims to those resources: $\text{Assets} = \text{Liabilities} + \text{Stockholders' Equity}$.

Assets

Total economic resources of a company that will benefit future operations, including cash, supplies, equipment, land, and inventory.

Liabilities

Amounts owed by a company to creditors, representing creditors' claims to the company's resources.

Stockholders' Equity

The owners' claims to company resources, consisting of common stock and retained earnings.

Revenues

Amounts recognized when a company sells products or provides services to customers.

Expenses

Costs of providing products and services and running business operations during the current period.

Net Income

The difference between total revenues and total expenses ($\text{Revenues} - \text{Expenses}$); also referred to as earnings or profit.

Dividends

Cash distributions made by a corporation to its stockholders, which reduce retained earnings but are not classified as business expenses.

Corporation

A business organization legally separate from its owners, providing stockholders with limited liability.

Sole Proprietorship

A business owned by one person, where the owner does not enjoy limited liability.

Partnership

A business owned by $2$ or more persons, where owners do not enjoy limited liability.

Income Statement

A primary financial statement that measures a company's revenues and expenses over an interval of time to report net income or net loss.

Statement of Stockholders' Equity

A financial statement summarizing the changes in common stock and retained earnings over an interval of time.

Balance Sheet

A financial statement presenting a company's financial position on a specific date, demonstrating that assets equal liabilities plus stockholders' equity.

Statement of Cash Flows

A financial statement that measures cash receipts and cash payments over an interval of time, classified into operating, investing, and financing activities.

Generally Accepted Accounting Principles (GAAP)

The formal financial accounting standards and rules established for corporate financial reporting in the United States.

Financial Accounting Standards Board (FASB)

An independent, private-sector body that holds primary responsibility for setting GAAP in the United States.

International Accounting Standards Board (IASB)

An independent organization responsible for establishing global financial accounting standards.

Securities and Exchange Commission (SEC)

The U.S. federal government agency that oversees FASB and regulates public companies and stock markets.

Auditors

Independent, trained professionals hired to express an opinion on whether financial statements comply with GAAP and are free of material misstatement.

Conceptual Framework

An underlying foundation established by FASB to provide standard setters with a benchmark for creating consistent financial reporting rules.

Relevance

A fundamental qualitative characteristic requiring accounting information to have predictive value, confirmatory value, and materiality to impact decision making.

Faithful Representation

A fundamental qualitative characteristic requiring financial information to be complete, neutral, and free from error.

Periodicity Assumption

The accounting assumption stating that the indefinite economic life of an enterprise can be divided into artificial time periods for periodic reporting.

Economic Entity Assumption

The accounting assumption stating that economic events can be separately identified with a particular business entity.

Going Concern Assumption

The accounting assumption stating that a business enterprise will continue operating indefinitely into the future.

Monetary Unit Assumption

The accounting assumption stating that a common scale of monetary unit (e.g., U.S. dollar) is used to measure economic activity.

External Transactions

Economic transactions conducted between a company and a separate economic entity or outside party.

Internal Transactions

Events affecting a company's financial position that occur within the business and do not involve an exchange with an external entity.

Account

A detailed record of all transactions related to a particular asset, liability, equity, revenue, expense, or dividend item over time.

Chart of Accounts

A comprehensive list of all account titles used by a company to record financial transactions.

Retained Earnings

A permanent stockholders' equity account representing cumulative net income minus cumulative dividends over the life of the business.

Deferred Revenue

A liability account created when a company receives cash in advance from customers before delivering products or services.

Debit

The left side of an accounting entry or T-account, used to increase assets, expenses, and dividends, or decrease liabilities, equity, and revenues.

Credit

The right side of an accounting entry or T-account, used to increase liabilities, equity, and revenues, or decrease assets, expenses, and dividends.

DEALOR

A mnemonic device standing for account types increased by debits ($\text{Dividends}$, $\text{Expenses}$, $\text{Assets}$) on the left side and credits ($\text{Liabilities}$, $\text{Owners' Equity}$, $\text{Revenue}$) on the right side.

Journal Entry

A chronological accounting format used to record business transactions using debits and credits.

Posting

The process of transferring debit and credit transaction data from the journal to individual accounts in the general ledger.

General Ledger

A complete collection of all individual accounts maintained by a company showing transaction histories and current balances.

T-Account

A simplified visual representation of a general ledger account, featuring the title at the top, a left debit side, and a right credit side.

Trial Balance

An internal schedule listing all account names and balances at a specific date to verify that total debits equal total credits.

Accrual-Basis Accounting

An accounting method required by GAAP where economic events are recorded as they occur (revenues when earned, expenses when used), regardless of cash flow timing.

Cash-Basis Accounting

A non-GAAP accounting method where revenues are recorded only when cash is received and expenses are recorded only when cash is paid.

Adjusting Entries

Journal entries recorded at period-end to reflect unrecorded timing differences under accrual accounting and update asset, liability, revenue, and expense balances.

Prepaid Expenses

Assets created when a company pays cash in advance for economic benefits that will be used in future operating periods.

Book Value

The original cost of a long-term asset minus its accumulated depreciation; also known as carrying value.

Accrued Expenses

Costs incurred by a business in the current period for which cash has not yet been paid, creating a liability.

Accrued Revenues

Revenues earned for goods or services provided during the current period for which cash has not yet been received, creating an asset.

Adjusted Trial Balance

A list of all general ledger accounts and their updated balances prepared after adjusting entries have been posted.

Closing Entries

Journal entries prepared at the end of an accounting period to transfer temporary account balances to retained earnings and reduce temporary account balances to zero.

Temporary Accounts

Accounts measuring activity for a single period (revenues, expenses, and dividends) whose balances are closed to zero at period-end.

Permanent Accounts

Balance sheet accounts (assets, liabilities, and stockholders' equity) whose balances carry forward indefinitely across periods.

Post-Closing Trial Balance

A list of permanent accounts and their balances prepared after closing entries are posted to confirm general ledger accuracy before the next period.

Occupational Fraud

The deliberate misuse or misapplication of an employer's resources by an employee for personal enrichment.

Fraud Triangle

A framework identifying the $3$ necessary elements for occupational fraud: Opportunity, Motivation, and Rationalization.

Internal Controls

A company's collective plan and procedures to safeguard assets and improve the accuracy and reliability of accounting information.

Sarbanes-Oxley Act (SOX)

Federal legislation passed in $2002$ establishing regulatory guidelines for internal control effectiveness, corporate executive accountability, and auditor-client independence.

Public Company Accounting Oversight Board (PCAOB)

A $5\text{-member}$ oversight board appointed by the SEC under SOX to establish auditing, ethics, and quality control standards.

Separation of Duties

A preventive control dividing authorization, recording, and physical custody of assets among different employees to minimize fraud risks.

Collusion

The act of $2$ or more employees coordinating together to circumvent internal control procedures.

Cash Equivalents

Short-term, highly liquid investments maturing within $3$ months from purchase date, such as money market funds, Treasury bills, and certificates of deposit.

Bank Reconciliation

A schedule matching and resolving differences between the balance of cash in the bank statement and the balance of cash in the company's general ledger.

Deposits Outstanding

Company cash receipts that have been recorded in the company's books but have not yet been added to the bank statement balance.

Checks Outstanding

Checks written and recorded by a company that have not yet cleared or been deducted on the bank statement.

NSF Check

A customer check deposited by a company that is returned unpaid by the bank due to non-sufficient funds in the customer's account.

Petty Cash Fund

A small amount of physical cash kept on hand at a business location to pay for minor, everyday business expenditures.

Investing Activities

Section of the statement of cash flows reporting cash transactions for the purchase and sale of long-term assets and investment securities.

Financing Activities

Section of the statement of cash flows reporting cash transactions with lenders (borrowing and repaying debt) and equity owners (issuing stock and paying dividends).