Chapter 1: Financial Accounting

Flashcards covering Chapter 1 concepts from Introduction to Business and Financial Accounting, suitable for exam review.

What is the accounting language of business and why is it important?

Accounting is an information system that systematically identifies, collects, records, and communicates financial information about business activities to various users.

Who are the external users of accounting information?

Investors, creditors, suppliers, customers, and government.

Who are the internal users of accounting information?

Managers and employees.

Name the four primary financial statements.

Income Statement, Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows.

What is the fundamental accounting equation?

Assets = Liabilities + Stockholders’ Equity.

What are the three main categories of business activities?

Financing activities, investing activities, and operating activities.

What is the difference between financial accounting and managerial accounting?

Financial accounting focuses on external users, GAAP-based, historical; managerial accounting focuses on internal users, no strict standards, and future-oriented.

What are the forms of business ownership discussed in the notes?

Sole proprietorship, partnership, corporation (C corp vs S corp), and LLC/LLP.

Describe a sole proprietorship.

A business owned by one person; the owner is personally liable for the debts of the business.

Describe a corporation.

A legally separate entity; stockholders’ liability is limited to the amount invested.

Describe a partnership.

A business owned by two or more persons; general and limited partnerships.

How do forms differ in capital formation?

Sole proprietorships and partnerships have less access to funding; corporations have greater access via stock and bonds from many sources.

What is a classified balance sheet?

A balance sheet that groups assets and liabilities into current and non-current (long-term) categories.

Define current vs non-current assets.

Current assets are expected to be converted to cash within one year or one operating cycle; non-current assets are long-term.

Name typical current liabilities.

Accounts payable, salaries payable, unearned revenue, interest payable, and income taxes payable.

What is the difference between assets and liabilities?

Assets are economic resources; liabilities are obligations to creditors.

What items comprise stockholders’ equity?

Contributed capital (common stock and paid-in capital), retained earnings, and sometimes treasury stock.

What is retained earnings?

The portion of net income kept in the business for future growth rather than distributed as dividends.

What is the purpose of the Statement of Retained Earnings?

To show changes in retained earnings during the period (net income and dividends).

What is the purpose of the Statement of Stockholders’ Equity?

Summarizes changes in stockholders’ equity over a period (including common stock, retained earnings, and net income with dividends).

What is the difference between the Balance Sheet and the Income Statement?

Balance Sheet reports financial position at a point in time; Income Statement reports results of operations over a period.

What is the Statement of Cash Flows and its categories?

Reports cash receipts and payments for a period; categorized into operating, investing, and financing activities.

What is GAAP and which organizations influence it?

GAAP = Generally Accepted Accounting Principles; influenced by the SEC, FASB, IASB/IFRS, and PCAOB.

What are the fundamental qualitative characteristics of useful information?

Relevance and faithful representation.

What are the enhancing qualitative characteristics?

Comparability, verifiability, timeliness, and understandability.

Name the four basic GAAP assumptions.

Economic Entity, Going Concern, Time Period, and Monetary Unit.

Name the GAAP principles listed in the notes.

Historical Cost, Revenue Recognition, Matching, Conservatism, and Full Disclosure.

What is the role of auditors?

Independent professionals who express an opinion on whether financial statements conform to GAAP and provide credibility to users.