Chapter 1 A Framework for Financial Accounting

Accounts Receivable

What customers owe the company after a service has already been provided

Intabgibles

licenses, patents

Accounts Payable

What the company owes to its vendors or suppliers

Accrued Expenses

An expense that was used but has not been paid for yet (Ex: electric meter, electricity has been used, but the user has not been billed yet)

Notes Payable

The company borrows money from someone and will have to pay it back with interest

Unearned Revenue

Cash a company earned before providing a good or service (Ex: Gift cards)

Common Stock

Represents amounts invested by stockholders when they purchase shares of stock

Retained Earnings

Net income that hasn't been distributed

Sole Proprietorship

owned by a single individual

Partnership

Owned by two or more individuals

Corporation

Ownership represented by shares of stock; a company that is legally separate from its owners

Double Taxation

Companies pay taxes on their earnings at the corporate level, and dividends get taxed at the stockholder level

Assets

resources of the company

Liabilities

Creditors claims to resources

Stockholders' Equity

owners' claims to resources

Revenues

sales of products or services to customers

Expenses

cost of selling products or services

Dividends

distribution of profit to stockholders (not an expense)

Income Statement

Reports the company's revenues and expenses over an interval of time

Balance Sheet

presents the financial position of the company at a point in time

Statement of Stockholders' Equity

summarizes the changes in stockholders' equity over an interval of time

Ending Retained Earnings

Beginning Retained Earnings + Net Income - Dividends =

Stockholders' Equity

Common Stock + Retained Earnings =

Accounting Equation

Assets = Liabilities + Stockholders' Equity

Financing Cash Flows

include cash transactions with lenders, such as borrowing money, repaying debt, and with stockholders, such as issuing stock and paying dividends (Ex: borrowing money from the bank)

Investing Cash Flows

Cash transactions involving the purchase and sale of investments and long-term assets, such as equipment (Ex: Purchasing equipment)

Operating Cash Flows

Cash transactions involving revenue and expense activities, such as providing products or services to customers and the associated costs of doing so, like rent, salaries, utilities, taxes, and advertising (Ex: Selling merchandise to customers)

Statement of Cash Flows

measures activities involving cash receipts and cash payments over an interval of time

Economic Entity Assumption

All economic events with a particular economic entity can be identified

Monetary Unit Assumption

A unit or scale of measurement can be used to measure financial statement elements

Periodicity Assumption

The economic life of an enterprise (presumed to be indefinite) can be divided into artificial time periods for financial reporting

Going Concern Assumption

In the absence of information to the contrary, a business entity will continue to operate indefinitely

Accounting

The system of maintaining records of a company's operations and communicating that information to decision makers

Investors

make decisions related to buying and selling their shares of the company stock; buy ownership in the company and have the right to share in the company's profits

Creditors

make decisions related to lending money to the company

Limited Liability

Prevents stockholders from being held personally responsible for the financial operations of the corporation

Financial Statements

The company publishes periodic reports for the purpose of communicating its business activities to those outside of the company

Four Primary Financial Statements

Income statement, balance sheet, statement of stockholders' equity, and statement of cash flows

Capital Markets

A composite of all investors and creditors who provide funds to businesses who need them

Generally Accepted Accounting Principles (GAAP)

The formal standards that have been established for the purpose of financial reporting

Securities and Exchange Commission (SEC)

Government agency in the US responsible for overseeing and enforcing accounting and disclosure requirements for companies issuing and selling securities to the public

Financial Accounting Standards Board (FASB)

An independent, private body that has been given the responsibility by the SEC for establishing accounting and reporting standards (GAAP) for public and private companies in the US

International Accounting Standards Board (IASB)

An international accounting standard-setting body established to issue global standards to help make accounting practices more comparable worldwide

International Financial Reporting Standards (IFRS)

The standards being developed and promoted by the IASB

Auditors

Hired by a company as an independent party to express a professional opinion of the conformity of that company's financial statements with GAAP

Ethics

A code or moral system that provides criteria for evaluating right and wrong behavior

Public Accounting

professional service firms that traditionally have focused on three areas: auditing, tax preparation/planning, and business consulting

Private Accounting

providing accounting services to the company that employs you

Decision Usefulness

the ability of the information to be useful in decision making

Relevance

Accounting information that possesses confirmatory value and/or predictive value

Faithful Representation

Accounting information that is complete, neutral, and free from error

Comparitability

The ability of users to see similarities and differences between two different business activities

Consistency

The use of similar accounting procedures either over time for the same company, or across companies at the same point in time

Verifiability

A consensus among different measurers

Timeliness

information being available to users early enough to allow them to use it in the decision process

Understandability

Users must understand the information within the context of the decision they are making

Cost Constraint

Financial accounting information is provided only when the benefits of doing so exceed the costs

Notes Receivable

What the company is owed by whoever took a loan from them

Prepaid Expense

Something has been paid for in advance, but has not been consumed yet

Conceptual Framework

provides an underlying foundation for the development of accounting standards and the interpretation of accounting information