Financial Accounting Fundamentals and Standards Flashcards

Comprehensive vocabulary flashcards covering the foundations of financial accounting, regulatory bodies, accounting principles, and the conceptual framework based on lecture notes.

Financial Accounting

A branch of accounting chiefly concerned with providing financial information to various external users such as investors and creditors.

Financial Statements

The primary means of conveying financial information to external users, most frequently including the balance sheet, income statement, statement of cash flows, and statement of shareholders’ equity.

Balance Sheet

A financial statement, also referred to as the statement of financial position, that reports a company's assets, liabilities, and equity at a specific point in time.

Income Statement

A financial statement, also called the statement of operations, that measures a company's financial performance over a specific reporting period.

Financial Intermediaries

A group of external users including financial analysts, stockbrokers, mutual fund managers, and credit rating organizations who provide advice or make decisions on behalf of investors and creditors.

Capital Markets

A composite of all investors and creditors that provides a mechanism to help the economy allocate resources efficiently.

Corporation

The dominant form of business organization in terms of ownership of productive resources, where ownership is represented by shares of stock.

Rate of Return

A measure of investment performance calculated as the total gain (dividends plus price appreciation) divided by the original investment; for example, an investment of $\$50,000$ that yields $\$800$ in dividends and sells for $\$51,200$ generates a return of $4\%$.

Risk

The uncertainty or unpredictability associated with the expected rate of return on an investment.

Accrual Accounting

An accounting model that measures resources provided by operations (revenues) and resources sacrificed (expenses) during a period, regardless of when cash is received or paid.

Cash-basis Accounting

An accounting model that measures the difference between cash receipts and cash payments from transactions related to providing goods and services, producing a measure called net operating cash flow.

Net Operating Cash Flow

The measure of performance under cash-basis accounting calculated as the difference between cash receipts and cash payments during a reporting period.

Revenues

The measure of resources provided by business operations during a period under the accrual accounting model.

Expenses

The measure of resources sacrificed to produce revenues during a period under the accrual accounting model.

Net Income

The difference between revenues and expenses; referred to as a net loss if expenses are greater than revenues.

Free Enterprise Economy

An economic system, such as that in the United States, where the majority of productive resources are privately owned rather than government owned.

Dividends

Periodic distributions of cash made by a corporation to its shareholders as a return on their investment.

SEC (Securities and Exchange Commission)

A U.S. government agency with the legal authority to set accounting standards for companies whose stock is publicly traded.

FASB (Financial Accounting Standards Board)

The current private-sector body responsible for establishing Generally Accepted Accounting Principles (GAAP) in the United States.

GAAP (Generally Accepted Accounting Principles)

A dynamic set of both broad and specific guidelines that companies should follow when measuring and reporting the information in their financial statements.

EITF (Emerging Issues Task Force)

A group formed by the FASB to provide timely responses to narrowly-defined financial accounting issues within the framework of existing GAAP.

IASB (International Accounting Standards Board)

An independent organization that develops global accounting standards known as International Financial Reporting Standards (IFRS).

Accounting Standards Codification (ASC)

The single source of authoritative nongovernmental U.S. GAAP, implemented in $2009$ to simplify the task of researching accounting topics.

Conceptual Framework

A system of interrelated objectives and fundamentals, often called the 'Accounting Constitution,' that provides structure and guidance for developing consistent accounting standards.

Relevance

A fundamental qualitative characteristic of accounting information, requiring that it possess predictive value, confirmatory value, and/or materiality.

Faithful Representation

A fundamental qualitative characteristic requiring that accounting information be complete, neutral, and free from material error.

Neutrality

The requirement that accounting standards and information be unbiased and not favor one group of users over another.

Comparability

An enhancing qualitative characteristic that helps users see similarities and differences between different companies' financial reports.

Consistency

The quality of information that results from a company applying the same accounting practices over different reporting periods.

Verifiability

An enhancing characteristic implying that different knowledgeable and independent observers could reach a consensus that the information is a faithful representation.

Timeliness

The requirement that information be available to users early enough to be capable of influencing their decisions.

Understandability

The quality of information that enables users with reasonable business knowledge to perceive its significance.

Cost Effectiveness

The constraint that the benefits of providing financial information must justify the costs of gathering and disseminating that information.

Assets

Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.

Liabilities

Present obligations of an entity to transfer an economic benefit to other entities as a result of past transactions or events.

Equity

The residual interest in the assets of an entity that remains after deducting its liabilities, also referred to as net assets.

Comprehensive Income

The change in equity of a business enterprise during a period from nonowner sources.

Economic Entity Assumption

The assumption that economic events can be identified with a specific unit of accountability, separate from its owners and other entities.

Going Concern Assumption

The assumption that a business entity will continue to operate indefinitely, justifying the use of historical cost for long-term assets.

Periodicity Assumption

The assumption that allows the economic life of a company to be divided into artificial time periods for financial reporting.

Monetary Unit Assumption

The assumption that financial statement elements should be measured in a particular monetary unit, such as the U.S. dollar, which is assumed to be stable.

Recognition

The process of formally admitting an item into the basic financial statements as an element.

Measurement

The process of associating numerical or dollar amounts with various elements of the financial statements.

Historical Cost

A measurement attribute that bases value on the amount given or received in the original exchange transaction.

Net Realizable Value

The amount of cash into which an asset is expected to be converted in the ordinary course of business, less any costs of completion or disposal.

Fair Value

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Full Disclosure Principle

The principle that requires financial reports to include any information that could affect the decisions of external users, subject to the cost-effectiveness constraint.

Asset/Liability Approach

A standard-setting approach where the primary focus is on the measurement of assets and liabilities, with revenues and expenses being derived from changes in those elements.

Sarbanes-Oxley Act

A $2002$ law passed to restore investor confidence through increased corporate accountability, auditor regulation, and penalties for financial reporting violations.

Unqualified Opinion

An auditor's report signaling that the financial statements present fairly the company's financial position in conformity with U.S. GAAP.