Chapter 1 Accounting Terms + Equations

What is Accounting?

An information system designed to measure business activity, process info, and communicate that info to decision makers. It does the following:

1) Measures Business Activities

2) Processes that Info into Reports

3) Communicates the results to decision makers

What are some key accounting activities?

1. Investigating financial evidence

2. Development of computer programs to process accounting information

3. Communicating financial results to interested parties

What is Financial Accounting?

Financial accounting is the systematic process of recording, summarizing, and reporting business transactions to create standardized financial statements for external users (line investors, lenders, or the government)

What is Managerial Accounting?

Managerial accounting is the practice of analyzing and sharing financial data with internal leaders so they can make smart daily and long-term business decisions.

What is the Economic Entity Assumption?

A foundational principle that treats a business as a separate and distinct entity from its owners, managers, employees, and other businesses.

Assets

The economic resources a business owns to provide future resources (cash, merchandise, inventory, land)

Liabilities

What the business owes to its creditors

Equity

The net worth or remaining value of a business that belongs to its owners or shareholders after you subtract all liabilities from total assets

Accounting Equation

Assets= Liabilities + Assets

What does the income state calculate?

It calculates profitability.

Balance Sheet

It is a financial statement that provides a snapshot of a company's financial position—showing what it owns, what it owes, and the value left for owners—at a specific point in

Cash Flow Statements

A cash flow statement is a financial report that tracks the actual cash entering and leaving a business over a specific period.

Statement of Owner’s Equity

Creditor

Any person or business to whom a business owns money. A credit evaluates a company’s ability to make payments by reviewing its financial statements.

What is a CPA?

A licensed professional accountant that serves the public

What is a CGMA? (Certified Global Management Accountant)

An accountant who has advanced signifying advanced expertise in finance, strategy, operations, and management.

What is a CMA?

Certified Management Accountant. Works for a single company.

What is a CFP?

Certified professionals who work with individuals on their budgeting, retirement, and other personal financial goals.

What are the three types of accounting?

1. 1. Public (Big 4)

2. 2. Private (Budgeting or cost management for a single company)

3. 3. Government Accounting (Trying to help run the federal, state, or local level)

What is the FASB and what does it do?

It is the Financial Accounting Standards Board. It’s a 7-member group that is not part of the US government. FASB sets GAAP.

What is GAAP?

What is the SEC and what does it do?

What is IFRS?

What are the various business entities?

What is the cost principle?

What is the going concern assumption?

What is the monetary unit assumption?

Which accounting overseer creates GAAP and which creates IFRS?

What’s the main difference between GAAP and IFRS

GAAP is more rules-based, and IFRS is more principles-based

Sarbanes Oxley Act

Passed after Enron + Worldcomm and was created to..

What increases equity?/What decreaeses equity?

Owner contributions and revenue/Owner withdrawals and expenses

What’s the important thing to remember about owner’s withdrawals?

Owners withdrawals are not considered an expesne and will not show up on the income statement.

What is the equity equation?

What is a transaction?

A transaction is any business event that can be measured reliably (purchasing a building, selling merchandise, paying rent)

What is the three step process for analyzing transactions?

1. 1. Identify the accounts and accounts type

2. 2. Decide if each account is increasing or decreasing

3. 3. Determine if the accounting equation balances

What is the expanded accounting equation?

Cash + Accounts Receivable + Office Supplies + Land = Accounts Payable + Owner’s Equity Account - Owner’s Withdrawals + Service Revenue - Rent Expense - Salaries Expense

What are the 4 financial statements and which question does each answer?

What is the income statement?

Answers the question: Is this business profitable?

What is the statement of retained earnings?

It answers the quesiton: How does the business use its earnings?

What is the balance sheet?

It answers the question: What are the assets of the business and who has a claim to them?

What is the statement of cash flows?

It answers the question is there enough cash flow in the business?

Return on assets

Measures how profitably a company uses it’s assets (Net income / Average total assets.) Average total assets

What is important to remember about analyzing each transation in the financial equation?

Each transaction must affect at least two accounts but could affect more than two.

What are expenses?

Expenses are the costs of sellign goods or services

What is equity equal to?

Owner’s capital - owner’s withdrawals + revenues - expesnes

How are supplies treated in this book vs in most businesses?

If the supplies are expected to be consumed in 12 months or less, most companies will record the supplies as an expense instead of an asset. In this text, we assume that all supplies will not be consumed in 12 months or less. Therefore, we will record supplies as an asset when they are purchased.

What is the expanded owner’s equity equation?

Ending Equity=Beginning Equity+Owner Contributions+Revenues−Expenses−Owner Withdrawals

Which equation represents the balance sheet?

The balance sheet is the application of the accounting equation in a real-world financial statement, while the equation is the rule that ensures the balance sheet is accurate

Which equation represents the income statment?

Like

Dislike

Net Income = (Revenues + Gains) – (Expenses + Losses

What is IFRS?

International Financial Reporting Standards (IFRS) are a set of accounting rules that tell public companies how to record and report their financial transactions and statements. 140+ countries use this, but the US uses GAAP.

What does GAAP do?

What does GAAP identify?

1. The objectives of financial accounting

2. The chrematistics of accounting

3. The elements of accounting

What is the primary purpose of financial accounting?

Provide information that is useful for parties to make investment and lending decisions

What are the key elements of financail reportign

1. Be relevant

2. Must have faithful representation

What is the monetary unit assumption?

What is the difference between GAAP and IFRS?

GAAP is more rules-based, and is used in the US. IFRS is more principles-based and is used in over 160 countries.

What is the cost principle?

Any assets or services a company acquires should be recorded at their actual cost of purchase.

What is the going concern assumption?

The going concern assumption is a fundamental accounting principle stating that a business will continue to operate for the foreseeable future—usually at least the next 12 months—without the need or intention to liquidate or shut down.

What is the monetary unit assumption?

The monetary unit assumption is an accounting principle stating that a business should only record and report economic events and transactions that can be measured in a standard unit of currency, such as the U.S. dollar.