Introduction to Financial Accounting and Statements

This flashcard deck covers the fundamental principles, definitions, and relationships within financial accounting as presented in the introductory lecture notes and video transcript.

Financial statements

The core reports comprising the Balance Sheet, Income Statement, Statement of Cash Flows, and Statement of Equity, used to represent a company's financial position.

Accounting transaction

Any business event that results in a measurable impact on the company's financial statements.

FASB

The Financial Accounting Standards Board, which is the private organization in the U.S. that sets accounting rules.

GAAP

Generally Accepted Accounting Principles, the specific rules and standards followed by accountants in the U.S.

Historical cost principle

The requirement to report assets and events at their original cost at the time the transaction occurred, rather than their current market value.

Conservatism principle

An accounting rule that requires recognizing a loss if there is reasonable evidence one has occurred, but prohibits recognizing gains until they are realized through a sale.

Materiality

A concept stating that information must be reported if its disclosure would influence the decision of an average prudent investor.

Going concern assumption

The premise that a business will continue to operate and exist for the indefinite future unless there is evidence otherwise.

Periodicity assumption

The requirement to divide a company's ongoing life into annual periods for reporting purposes.

Revenue recognition principle

The standard that requires recording revenue in the period it is earned, regardless of when the cash is actually received.

Matching principle

The process of recording expenses in the same period as the revenues they helped to generate.

Accounting Equation

$$\text{Assets} = \text{Liabilities} + \text{Owners' Equity}$$

Balance Sheet

A report showing a company's assets, liabilities, and stockholders' equity at a specific point in time.

Income Statement

A financial report that calculates profit or loss for a specific period by subtracting expenses from revenues.

Statement of Cash Flows

A report detailing how cash was obtained and used during a period, divided into operating, investing, and financing activities.

Assets

Economic resources owned by a business that are expected to provide future economic value, such as cash, land, or equipment.

Liabilities

Claims against a business's assets made by external parties or non-owners, representing obligations to be paid.

Paid-in capital

The portion of equity that comes from direct investments made by owners, often referred to as common stock in a corporation.

Retained earnings

The cumulative portion of net income that a business has earned but has not yet paid out to its owners.

Dividends

Distributions of corporate earnings to shareholders as a return on their investment; they are a reduction of retained earnings rather than an expense.

Return on assets (ROA)

$\frac{\text{Net income}}{\text{Average total assets}}$, used to compare a company's earnings relative to its total investment in assets.

Financial Accounting

A field of accounting focused on providing information to external users like investors and creditors, following GAAP.

Managerial Accounting

A branch of accounting used for internal business planning and decision-making by management; it does not follow mandatory external guidelines.

Asset source transaction

A transaction that increases both the total assets and the total claims of the business.

Asset exchange transaction

A transaction where one asset is traded for another, such as buying land with cash, which does not change the total asset value.

Operating activities

Cash flow activities primarily related to running the daily business and generating net income.

Investing activities

Cash flows involving the acquisition or sale of long-term assets such as land or equipment.

Financing activities

Cash flow events related to interactions with owners and creditors, such as issuing stock, borrowing money, or paying dividends.

IFRS

International Financial Reporting Standards, the set of accounting rules followed by many countries outside the United States.

Articulate

The term describing how the four financial statements interrelate to one another in a self-balancing manner.