Financial Accounting Chapter 1: Financial Statements

Practice flashcards covering types of accounting, business organizations, accounting assumptions, principles, the accounting equation, and financial statements based on Chapter 1 lecture notes.

Accounting

An information system that measures business activities, processes data into financial statements and reports, and communicates results to decision makers; often called the language of business.

Financial Accounting

Accounting focused on providing information for decision makers outside the entity, including financial statements like the Income Statement and Balance Sheet.

Managerial Accounting

Accounting focused on providing information for managers inside the entity, including budgets, forecasts, and projections.

Proprietorship

A business form with one owner who is personally liable for business debts and whose income is taxed on the owner's personal tax return.

(General) Partnership

A business with two or more owners who share risk and are personally liable for the debts of the business.

Limited Liability Partnership (LLP)

A business with two or more partners where general partners are personally liable, but limited partners are not $100\%$ liable for the whole business.

Limited Liability Company (LLC)

A business form where one or more owners (members) are not personally liable for the company's debts.

Corporation

A business form with stockholders who generally have many owners and are not personally liable; it is subject to double taxation on corporate and shareholder levels.

Double Taxation

A tax consequence for corporations where income is taxed on a corporation tax return and again on the shareholders' tax returns.

Generally Accepted Accounting Principles (GAAP)

The US rule book or professional framework used by external decision makers in the US to evaluate financial statements.

International Financial Reporting Standards (IFRS)

The international rules used by external decision makers worldwide to evaluate financial statements.

Entity Assumption

The accounting assumption that the entity and its owners are separate economic units.

Continuity (Going-Concern) Assumption

The assumption that a company will continue to operate until it no longer has the assets to do so.

Historical Cost Principle

The principle that assets should be recorded at their actual cost on the date of purchase rather than fair value.

Stable-Monetary-Unit Assumption

The assumption that the dollar’s purchasing power is stable over time, meaning accounting records do not adjust for inflation.

Assets

Things the company owns, including cash, buildings, land, supplies, prepaid expenses, accounts receivable, inventory, and trucks.

Liabilities

The people or entities the company owes money to, including notes payable, long-term debt, accrued expenses payable, and accounts payable.

Equity

The cash or property invested in the company, plus net income (or loss) over time, minus any cash or property given to the owners.

Accounting Equation

The fundamental formula represented as $\text{Assets} = \text{Liabilities} + \text{Equity}$.

Income Statement

A financial statement that reports total revenues minus total expenses to determine net income or net loss.

Statement of Retained Earnings

A financial statement showing the formula: $\text{Beginning retained earnings} + \text{Net Income} (\text{or} - \text{Net Loss}) - \text{Dividends declared} = \text{Ending retained earnings}$.

Balance Sheet (Statement of Position)

A financial statement that lists a company's assets, liabilities, and stockholders' equity at a specific point in time.

Net Income Formula

$\text{Revenues} - \text{Expenses} = \text{Net income (or Net loss)}$.