Accounting Chapter 1 Week 1 (redo)

What is accounting?

An information system that identifies, measures, records, and communicates a company’s economic activities to help users make informed decisions.

What is the purpose of accounting?

To provide objective, accurate, and reliable financial information for decision-making by managers, investors, and other stakeholders.

Why is accounting called the language of business?

Because it communicates a company’s financial performance and financial position.

What makes accounting information useful?

It is useful when it is relevant, complete, neutral, and free from error, faithfully representing economic events.

What are the key qualities of accounting information?

Accounting information should be understandable, reliable, accurate, and objective.

Who are internal users of accounting information?

Employees, managers, and directors, who use it to plan operations, manage resources, and evaluate performance.

Why do internal users use accounting information?

To evaluate performance, calculate bonuses, plan operations, and manage resources efficiently.

Who are external users of accounting information?

Users not involved in running the company, like investors, lenders, government agencies, and customers.

Why do investors use accounting information?

To track profits, growth, and dividends, and evaluate the company before investing.

Why do lenders use accounting information?

To assess a company’s ability to repay loans and interest obligations.

Why do government agencies use accounting information?

To verify tax compliance, regulatory adherence, and financial accuracy.

What is a sole proprietorship?

A business owned by one person, with unlimited liability and no separate legal identity.

What are the key features of a sole proprietorship?

One owner, unlimited liability, no separate legal identity, and limited life.

What is a partnership?

A business owned by two or more individuals sharing profits, losses, and liabilities.

What are the key features of a partnership?

Shared ownership, shared profits, shared liability, and life determined by the agreement.

What is a corporation?

A business with a separate legal identity, owned by shareholders.

What are the key features of a corporation?

Limited liability, unlimited life, separate legal identity, and many owners.

What does IFRS stand for?

International Financial Reporting Standards, used by public companies for consistent financial reporting.

What does GAAP stand for?

Generally Accepted Accounting Principles, the rules for accounting in the U.S.

Why are accounting standards important?

They ensure financial statements are consistent, transparent, and comparable.

What is the role of a CPA?

To ensure accounting information is accurate, reliable, and ethically prepared.

What ethical responsibilities do accountants have?

Remain independent, maintain professional competence, confidentiality, and integrity, and report financial results accurately.

What is the accounting equation?

Assets = Liabilities + Equity; it shows how resources are financed by creditors and owners.

What are assets?

Resources that provide future economic benefits, such as cash, inventory, or equipment.

What are liabilities?

Obligations requiring future economic sacrifice, like loans or accounts payable.

What is equity?

The owner’s residual interest in assets after liabilities.

What is the historical cost principle?

Assets are recorded at their original purchase price, not current market value.

What is the economic entity assumption?

A business’s transactions are separate from the personal transactions of its owners.

What is the difference between cash and accrual accounting?

Cash accounting records transactions when cash changes hands; accrual accounting records revenues when earned and expenses when incurred.

Which accounting method is used in financial statements?

Accrual accounting, because it provides a more accurate picture of financial performance.

What is revenue recognition?

Revenue is recognized when earned, even if cash hasn’t been received.

When are expenses recognized?

Expenses are recognized when incurred, matching them with related revenues.

What is accounts receivable?

Money owed by customers for goods or services sold on credit.

What is deferred revenue?

Cash received before delivering goods or services, recorded as a liability

• ex. down payment

What is the purpose of the income statement?

To report revenues, expenses, and net income over a period, showing profitability.

What is gross profit?

Revenue minus the cost of goods sold, showing profit before operating expenses.

What is net income or net loss?

Net income: revenues > expenses; Net loss: expenses > revenues.

What is retained earnings?

Profits kept in the company for reinvestment instead of paying dividends.

What is the balance sheet?

Shows a company’s assets, liabilities, and equity at a specific date.

What are current and non-current assets?

Current: expected to convert to cash or be used within a year. Non-current: long-term resources like equipment or property.

What are current and long-term liabilities?

Current: obligations due within a year.

Long-term: obligations due after one year.

What is working capital?

Current assets − current liabilities; measures short-term financial health.

What is liquidity?

A company’s ability to meet short-term obligations.

What does the statement of cash flows show?

Cash inflows and outflows from operating, investing, and financing activities.

What are operating activities?

Day-to-day business operations, like cash from customers and payments to employees.

What are investing activities?

Buying or selling long-term assets, such as equipment or property.

What are financing activities?

Raising or repaying capital, issuing shares, paying dividends, or repaying loans.

Why is the cash flow statement important?

It helps assess liquidity, solvency, and cash generation.

How are financial statements connected?

Net income flows from the income statement to retained earnings, which is reported in equity on the balance sheet.

How do dividends affect equity?

Dividends reduce retained earnings and total equity, reflecting payments to shareholders.