WGU D774

Accounting

The process of organizing, analyzing, & communicating financial information to support decision-making.

Accrual Accounting

An accounting method that records revenues & expenses when they are earned or incurred, not when cash changes hands.

Accounting Equation

The formula Assets = Liabilities + Equity, which underpins the balance sheet

Assets

Resources owned by a business that have value & can generate future benefit

Assurance

Independent verification that financial information or internal controls are reliable and comply with relevant standards

Auditor

A professional who examines financial records and controls to assess accuracy & compliance

Balance Sheet

A snapshot of a company's financial position at a given time, showing assets, liabilities, and equity

Break-Even Point

The level of sales at which total revenue equals total costs, resulting in neither profit nor loss

Budget Creep

The gradual increase in a budget over time due to repeated small increases that go unchallenged

Budget Variance

The difference between what was budgeted & what actually occurred in financial performance

Budgeting

The process of planning & managing income & expenses over a specific period to meet financial goals

Continuing Professional Education

Educational activities that professionals engage in to maintain, improve, & expand their skills & knowledge within their field

Contribution Margin

The amount remaining from sales revenue after variable costs are deducted; used to cover fixed costs & contribute to profit

Conversion Costs

The sum of direct labor & manufacturing overhead; costs involved in converting materials to finished goods

Cost Center

A department or function that incurs costs but does not directly generate revenue

Cost Efficiency

The ability to achieve desired outcomes with minimal expense, often a goal of zero-based budgeting

Cost Object

Anything for which costs are measured separately, such as a product, department, or customer order

Deficiency

A lack or weakness in meeting a required standard, guideline, or expectation.

Departmental Reporting

Tracking & evaluating financial performance by department or business unit

Direct Materials

Raw materials directly used in the production of goods

Direct Labor

Wages paid to employees directly involved in production

Discrepancy

A difference or inconsistency between two or more items that should be in agreement

Entity Perspective

The concept that a business is a separate economic unit, distinct from its owners, with its own financial records and activities

Exception Reporting

Highlighting insignificant differences between budgeted & actual figures to support financial decision-making

Expenses

The costs incurred in operating a business, such as wages, rent, & materials

External Auditor

An independent reviewer of financial statements & internal controls for accuracy & transparency

Favorable Variance

When actual income is higher, or expenses are lower than the budgeted amount

Fraud

Intentional deception or dishonest conduct aimed at gaining an unfair advantage or causing harm to others

Financial Accounting

Produces standardized reports for external stakeholders like investors & regulators

Fixed Costs

Costs that remain the same regardless of the level of business activity

Forecasting

Predicting future income or expenses based on past data & expected trends

Fraud Triangle

A model identifying 3 conditions that lead to fraud: pressure, opportunity, & rationalization

What does GAAP stand for?

Generally Accepted Accounting Principles.

What is the purpose of GAAP?

The standard framework for financial reporting in the U.S.

Gains

Income from non-operating activities, such as selling assets for more than their book value

Income Statement

A financial report that summarizes a business's revenues, expenses, gains, & losses over a period to determine profit or loss.

Incremental Budgeting

A budgeting method that adjusts last year's budget by small percentages or amounts, maintaining consistency

Industry Benchmarks

Standardized measures or performance metrics used to compare a company's performance against others in the same industry

Internal Controls

Procedures & systems used to safeguard assets, ensure accurate reporting, and reduce the risk of fraud

Liabilities

Financial obligations a company owes to others, such as loans & unpaid bills

Liquidity

The ability of a business to meet its short-term financial obligations using its available cash or easily convertible assets

Losses

Costs from non-operating events, such as selling assets at a loss or legal expenses

Managerial Accounting

Provides internal data to support planning, budgeting, & decision-making within an organization

Manufacturing Overhead

Indirect costs associated with production, such as utilities or equipment depreciation

Mixed Costs

Costs that have both fixed & variable elements, such as utility bills with a base fee and usage charge

Net Income (or Net Loss)

The amount of profit or loss remaining after all revenues, expenses, gains, & losses have been accounted for

Notes to the Financial Statements

Additional information provided in financial reports to explain or provide context for the figures presented

Operating Activities

Day-to-day business activities that generate cash, such as receiving customer payments & paying wages

Overextension

A situation where a business takes on more financial commitments than it can support, leading to cash flow strain or risk of default

Owner's Equity

The residual value in the business after subtracting liabilities from assets; represents the owner's financial interest

Period Costs

Non-manufacturing costs, such as admin or marketing, recorded as expenses in the period they occur

Prime Costs

The total of direct materials & direct labor in production

Product Costs

Costs directly related to manufacturing, including direct materials, direct labor, and manufacturing overhead

Profit Center

A business segment responsible for generating both revenue & expenses, evaluated based on profitability

Related-Party Transaction

A business arrangement between parties with a pre-existing relationship, which may influence the terms of the transaction

Responsibility Accounting

A system where financial accountability is assigned to specific managers or departments

Revenue

The total income earned from normal business operations before any costs are deducted

Sarbanes-Oxley Act (SOX)

A U.S. law introduced in 2002 to prevent corporate fraud by strengthening internal controls and audit practices

Segregation of Duties

An internal control practice that divides responsibilities among different individuals to minimize risks of error or fraud

Shell Corporation

A business entity that exists only on paper without significant assets or operations, often used for financial or legal purposes

Siphoned

When funds are secretly or improperly removed from a business, often for personal use or hidden purposes

Statement of Cash Flows

A financial statement that tracks actual cash inflows & outflows across operating, investing, & financing activities

Statement of Owner's Equity

A financial statement that shows changes in equity over a period due to investments, earnings, & withdrawals

Unfavorable Variance

When actual income is lower, or expenses are higher than the budgeted amount

Variable Costs

Costs that change in direct proportion to business activity levels

Variance

The difference between planned or expected results & actual outcomes, often used in budgeting & financial analysis

Zero-Based Budgeting (ZBB)

A budgeting approach that starts from scratch each cycle, requiring full justification for every expense

What is inventory and where does it show up?

An asset on the balance sheet

What is located on the income statement?

Revenues & Expenses

What is cost of sales?

Costs of goods sold (COGS)

What is gross profit?

The amount made from selling a product before expenses

What is Equity?

The value of an item that remains after considering what is owed for that item

What is shown on the Statement of Cash Flows?

Lists the cash inflows & outflows of the business for a period of time

What is Cash Basis?

Focuses on the flow of cash, Did I receive or did I pay cash?

Accrual Basis

What did I earn and what did I use?

What are the 2 basis of accounting?

Cash & Accrual

What 3 sections make up the statement of cash flows?

Operating, Investing, Financing

What is shown in the investing section of the statement of cash flows?

Cash activities related to business investments in long-term assets.

What is shown in the financing section of the statement of cash flows?

The activities related to the business long-term liabilities & equity transactions

What interacts with the statement of cash flows?

Balance sheet

What is the order of the Financial Statements?

Income Statement, Statement of Owner's Equity, Balance Sheet, Statement of Cash Flows

What is the Committee of Sponsoring Organizations (COSO)?

An independent group that sets accounting standards.

What did the COSO develop?

The Internal Control - Integrated Framework

What are the 5 key components of an effective internal control system?

Control Environment, Risk Assessment, Control Activities, Information & Communication, Monitoring

Which group is responsible for outlining the 5 key components of an effective internal controls system?

Committee of Sponsoring Organizations (COSO)

When was SOX introduced?

2002

What did SOX do?

It brought in legal requirements for stronger internal controls & greater executive accountability in financial reporting.

What does PCAOB stand for?

The Public Company Accounting Oversight Board

What does the PCAOB do?

Oversee auditing firms

What are the 3 types of organizations in the business world?

Governmental Agencies, Non-Profit Agencies, For Profit Businesses

What are stockholders owners of?

For-profit businesses

What does the Securities & Exchange Commission (SEC) do?

Regulators who use financial information to enforce rules, investigate fraud, & promote transparency

Who must follow reporting standards like GAAP?

Public companies

Who do Public companies file regular reports to?

SEC

What does IFRS stand for?

International Financial Reporting Standards

Who developed the IFRS?

IASB - International Accounting Standards Board

Who works with the IFRS to support international trade & investment?

Sec

True or False: Managerial accounting reports must comply with GAAP?

False

True or False: Financial accounting reports must comply with GAAP or IFRS?

True

Does Financial Accounting reflect historical or future data?

Historical