CHAPTER 1 (FINANCIAL ACCOUNTING)

Accounting

Information and measurement system that identifies, records, and communicates relevant information about a company's business activities.

Accounting equation

Equality involving a company's assets, liabilities, and equity; Assets = Liabilities + Equity; also called balance sheet equation.

Assets

Resources a business owns or controls that are expected to provide current and future benefits to the business.

Audit

Analysis and report of an organization's accounting system, its records, and its reports using various tests.

Auditors

Individuals hired to review financial reports and information systems.

Internal auditors

Employed to assess and evaluate a company's system of internal controls, including the resulting reports.

External auditors

Independent of a company and are hired to assess and evaluate the 'fairness' of financial statements.

Balance sheet

Financial statement that lists types and dollar amounts of assets, liabilities, and equity at a specific date.

Bookkeeping

Part of accounting that involves recording transactions and events, either manually or electronically; also called recordkeeping.

Business entity assumption

Principle that requires a business to be accounted for separately from its owner(s) and from any other entity.

Common stock

Corporation's basic ownership share; also generically called capital stock.

Conceptual framework

The basic concepts that underlie the preparation and presentation of financial statements for external users.

Corporation

Business that is a separate legal entity under state or federal laws; its owners are referred to as shareholders or stockholders.

Cost constraint

The notion that the benefit of a disclosure exceeds the cost of that disclosure.

Cost principle

Accounting principle that prescribes financial statement information be based on actual costs incurred in business transactions.

Cost-benefit constraint

The notion that the benefit of a disclosure exceeds the cost of that disclosure.

Data analytics

A process of analyzing data to identify meaningful relations and trends; in accounting, helps individuals make informed business decisions.

Data visualization

A graphical presentation of data to help people understand its significance and draw reliable inferences.

Equity

Owner's claim on the assets of a business; equals the residual interest in an entity's assets after deducting liabilities.

Ethics

Codes of conduct by which actions are judged as right or wrong, fair or unfair, honest or dishonest.

Events

Happenings that both affect an organization's financial position and can be reliably measured.

Expanded accounting equation

Expanded version of: Assets = Liabilities + Equity.

Expense recognition (or matching) principle

Prescribes expenses to be reported in the same period as the revenues that were earned as a result of the expenses.

Expenses

Outflows or using up of assets as part of operations of a business to generate sales.

External transactions

Exchanges of economic value between one entity and another entity.

External users

Persons using accounting information who are not directly involved in running the organization.

Financial accounting

Area of accounting aimed mainly at serving external users.

Financial Accounting Standards Board (FASB)

Independent group of full-time members responsible for setting accounting rules.

Full disclosure principle

Principle that prescribes financial statements (including notes) to report all relevant information about an entity's operations and financial condition.

Generally accepted accounting principles (GAAP)

Rules that specify acceptable accounting practices.

Going-concern assumption

Principle that prescribes financial statements to reflect the assumption that the business will continue operating.

Income statement

Financial statement that subtracts expenses from revenues to yield a net income or loss over a specified period of time; also includes any gains or losses.

Internal controls or internal control system

All policies and procedures used to protect assets, ensure reliable accounting, promote efficient operations, and urge adherence to company policies.

Internal transactions

Activities within an organization that can affect the accounting equation.

Internal users

Persons using accounting information who are directly involved in managing the organization.

International Accounting Standards Board (IASB)

Group that identifies preferred accounting practices and encourages global acceptance; issues International Financial Reporting Standards (IFRS).

International Financial Reporting Standards (IFRS)

Set of international accounting standards explaining how types of transactions and events are reported in financial statements; IFRS are issued by the International Accounting Standards Board.

Liabilities

Creditors' claims on an organization's assets; involves a probable future payment of assets, products, or services that a company is obligated to make due to past transactions or events.

Limited liability company (LLC)

Organization form that combines select features of a corporation and a limited partnership; provides limited liability to its members (owners), is free of business tax, and allows members to actively participate in management.

Managerial accounting

Area of accounting aimed mainly at serving the decision-making needs of internal users; also called management accounting.

Measurement principle

Principle that prescribes financial statement information, and its underlying transactions and events, be based on relevant measures of valuation; also called the cost principle.

Members

Owners of a limited liability company (LLC); rights and responsibilities are specified in the operating agreement and by state LLC regulations.

Monetary unit assumption

Principle that assumes transactions and events can be expressed in money units.

Net income

Amount earned after subtracting all expenses necessary for and matched with sales for a period; also called income, profit, or earnings.

Net loss

Excess of expenses over revenues for a period.

Owner investments

Assets put into the business by the owner.

Partnership

Unincorporated association of two or more persons to pursue a business for profit as co-owners.

Proprietorship

Business owned by one person that is not organized as a corporation; also called sole proprietorship.

Recordkeeping

Part of accounting that involves recording transactions and events, either manually or electronically; also called bookkeeping.

Retained earnings

Cumulative income less cumulative losses and dividends.

Return on assets (ROA)

Ratio reflecting operating efficiency; defined as net income divided by average total assets for the period; also called return on total assets or return on investment.

Revenue recognition principle

The principle prescribing that revenue is recognized when goods or services are delivered to customers.

Revenues

Gross increase in equity from a company's business activities that earn income; also called sales.

Securities and Exchange Commission (SEC)

Federal agency Congress has charged to set reporting rules for organizations that sell ownership shares to the public.

Shareholders

Owners of a corporation; also called stockholders.

Shares

Equity of a corporation divided into ownership units; also called stock.

Sole proprietorship

Business owned by one person that is not organized as a corporation; also called proprietorship.

Statement of cash flows

A financial statement that lists cash inflows (receipts) and cash outflows (payments) during a period; arranged by operating, investing, and financing.

Statement of retained earnings

Report of changes in retained earnings over a period; adjusted for increases (net income), for decreases (dividends and net loss), and for any prior period adjustment.

Stock

Equity of a corporation divided into ownership units; also called shares.

Stockholders

Owners of a corporation; also called shareholders.

Time period assumption

Assumption that an organization's activities can be divided into specific time periods such as months, quarters, or years.