Chapter 1: A Framework for Financial Accounting Flashcards

Vocabulary practice flashcards covering fundamental concepts, financial statements, and GAAP rules from Chapter 1.

Financial Accounting

The system of accounting focused on measuring business activities of a company and communicating those measurements to decision makers outside of the organization.

Accounting Equation

The fundamental financial relationship showing that company resources equal claims to those resources: $Assets = Liabilities + Stockholders' Equity$.

Assets

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

Liabilities

Amounts owed to creditors, representing creditor claims against the company's total resources.

Stockholders' Equity

Owners' claims to resources, calculated as the sum of Common Stock and Retained Earnings.

Revenues

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

Expenses

The costs of providing products and services and running other business operations during the current period.

Net Income

The difference between revenues and expenses ($Net Income = Revenues - Expenses$), also commonly referred to as earnings or profit.

Dividends

Cash payments distributed to stockholders, representing a distribution of net income rather than a business expense.

Corporation

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

Sole Proprietorship

A business owned by one individual that does not provide limited liability protection to its owner.

Partnership

A business owned by two or more people that does not provide limited liability protection to its owners.

Income Statement

A primary financial statement that reports a company's revenues and expenses over an interval of time to assess its ability to earn a profit.

Statement of Stockholders' Equity

A primary financial statement that summarizes changes in common stock and retained earnings over an interval of time.

Balance Sheet

A primary financial statement presenting a company's financial position by showing resources equal to claims to resources on a specific date.

Statement of Cash Flows

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

Operating Activities

Business activities involving transactions related to primary operations, such as revenue generation and expense costs like salaries, rent, and utilities.

Investing Activities

Business activities involving cash transactions for the purchase and sale of long-term assets and investments.

Financing Activities

Business activities involving cash transactions with lenders and stockholders, such as borrowing money, issuing stock, or paying dividends.

Generally Accepted Accounting Principles (GAAP)

The formal rules, standards, and conventions of financial accounting used for external reporting in the United States.

Financial Accounting Standards Board (FASB)

An independent, private body that holds primary responsibility for establishing Generally Accepted Accounting Principles (GAAP) in the United States.

Securities and Exchange Commission (SEC)

The U.S. government agency responsible for overseeing standard-setting bodies and requiring public companies to file annual Form 10-K reports.

International Accounting Standards Board (IASB)

The international standard-setting body responsible for establishing global accounting standards.

Form 10-K

The required annual report filed by publicly traded companies with the SEC at the end of each 12-month fiscal year.

Auditors

Independent trained professionals hired to express an opinion on whether financial statements are fairly presented in compliance with GAAP and free of material misstatement.

Data Analytics

The process of analyzing data to help improve financial and business decision-making.

Conceptual Framework

An underlying benchmark established by the FASB to guide standard setters in creating consistent financial reporting rules.

Periodicity Assumption

An underlying GAAP assumption stating that the economic life of an enterprise can be divided into artificial time periods for periodic financial reporting.

Fundamental Qualitative Characteristics

Relevance and Faithful Representation, which are required for financial accounting information to be useful for decision making.