Financial Accounting Exam Review - Chapters 1 & 2

Vocabulary practice flashcards covering fundamental concepts, financial statements, standard setters, and debits/credits for Chapters 1 and 2 of Financial Accounting.

Financial Accounting

The system of measuring business activities and communicating those measurements to external users such as investors, creditors, and regulators.

Income Statement

A primary financial statement that reports a company's financial performance over a period of time to show whether the company earned a profit.

Statement of Stockholders' Equity

A financial statement that explains the changes in owners' equity over a period of time.

Balance Sheet

A financial statement that acts as a snapshot showing a company's financial position—what it owns and owes—as of a specific date.

Statement of Cash Flows

A financial statement that explains the changes in cash during a period across operating, investing, and financing activities.

Operating Activities

Cash flow transactions related to revenues and expenses, such as cash received from customers and cash paid for salaries, rent, and utilities.

Investing Activities

Cash flow transactions related to long-term assets, such as the purchase or sale of equipment and investments.

Financing Activities

Cash flow transactions related to owners and creditors, such as issuing stock, borrowing money, and paying dividends.

Basic Accounting Equation

The foundational equation in accounting: $\text{Assets} = \text{Liabilities} + \text{Stockholders' Equity}$.

Assets

Resources owned by the company.

Liabilities

Amounts owed by the company to creditors.

Stockholders' Equity

The owners' claims on assets, composed primarily of Common Stock and Retained Earnings.

Revenues

Inflows recognized when earned as a result of providing goods or services to customers.

Expenses

Outflows recognized when incurred that represent the cost of generating revenues.

Net Income Formula

The equation used to determine profit: $\text{Revenues} - \text{Expenses} = \text{Net Income}$.

Dividends

Distributions of earnings to owners that increase the Dividends account and reduce retained earnings, but are not classified as expenses.

Financial Accounting Standards Board (FASB)

The primary standard-setting body for U.S. GAAP that issues Accounting Standards.

Securities and Exchange Commission (SEC)

The U.S. government agency with legal authority over financial reporting for public companies, which delegates standard-setting authority to the FASB.

Public Company Accounting Oversight Board (PCAOB)

An entity that regulates and inspects public company auditors and establishes auditing standards for public companies.

International Accounting Standards Board (IASB)

An independent organization that issues International Financial Reporting Standards (IFRS).

Conceptual Framework

A foundational structure that provides guidelines for developing accounting standards and resolving new issues when no standard exists.

Relevance

A fundamental qualitative characteristic of useful financial information, requiring that information be capable of making a difference in user decisions.

Faithful Representation

A fundamental qualitative characteristic requiring financial information to be complete, neutral, and free from error.

Debit

The left side of an accounting entry or T-account.

Credit

The right side of an accounting entry or T-account.

Account Increases Chart

A rule chart showing that Assets, Expenses, and Dividends increase with a Debit, whereas Liabilities, Equity, and Revenue increase with a Credit.

Deferred Revenue

A liability account that increases when cash is received in advance from a customer before the services are performed.