Financial Accounting Flashcards

Flashcards for Financial Accounting review.

Financial Accounting

To provide meaningful quantitative financial information regarding an entity’s activities to decision makers.

Relevance

Capable of making a difference to a decision maker.

Faithful Representation

Dependable and reliable.

Generally Accepted Accounting Principles (GAAP)

System that allows companies choices in preparing financial statements and depends on countless estimates with possible earnings management.

Securities and Exchange Commission (SEC)

The organization that oversees all publicly traded companies

External Audits- American institute of Certified Public Accountants (AICPA)

Audit opinion provides reasonable assurance that the statements are free of material misstatements, not a guarantee.

Balance Sheet

Describes the sources and uses of funds of a firm at a point in time.

Assets

Economic resources that are owned or controlled by a company that have future economic benefit

Liabilities

Future obligations to pay cash, transfer assets or provide services to another party

Owners’ Equity (Shareholders’ Equity)

The ownership interest in the net assets of an entity

Accounting Equation

Assets = Liabilities + Owners’ Equity or Uses of funds = Sources of funds

Current Assets

Assets that can be converted to cash within a year

Long-term Assets

Assets that cannot be easily converted to cash within a year

Current Liabilities

Liabilities that have maturities less than one year

Long-term Liabilities

Liabilities that have maturities longer than one year

Income Statement

Shows how much a company earned (not cash) over a period of time

Revenues

Increase in a company’s resources from the sale of goods or services

Expenses

Costs incurred in the normal course of business to generate revenues

Gains/Losses

Money made or lost outside of normal firm operations

Net Income or Loss

An overall measure of the performance of a company

Statement of Shareholders’ Equity

A reconciliation of the beginning and ending balances of shareholders’ equity accounts.

Statement of Cash Flows

The financial statement that describes an entity’s cash inflows and cash outflows during a period.

Operating Activities

Cash transactions that enter into the determination of net income

Investing Activities

Cash transactions involved in the purchase and sale of PPE, other long-term assets and making/collecting loans

Financing Activities

Cash transactions whereby resources are obtained or repaid to owners and creditors

Accounting Cycle

The procedure for analyzing, recording, summarizing, and reporting transactions of a business.

Transactions

An event that causes a change in balance sheet values

Account

An accounting record in which the results of transactions are accumulated

Double Entry Accounting

A method of accounting that includes Debits and Credits

Accrual Accounting

A system of accounting in which revenues and expenses are recorded as they are earned and incurred, not necessarily when cash changes hands

Revenue Recognition

Companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods or services.

Matching Principle

All costs and expenses incurred in generating revenues must be recognized in the same period as the revenue. If you can’t match with revenue, then recognize it immediately.

Financial Accounting

To provide meaningful quantitative financial information regarding an entity’s activities to decision makers.

Relevance

Capable of making a difference to a decision maker.

Faithful Representation

Dependable and reliable.

Generally Accepted Accounting Principles (GAAP)

System that allows companies choices in preparing financial statements and depends on countless estimates with possible earnings management.

Securities and Exchange Commission (SEC)

The organization that oversees all publicly traded companies

External Audits- American institute of Certified Public Accountants (AICPA)

Audit opinion provides reasonable assurance that the statements are free of material misstatements, not a guarantee.

Balance Sheet

Describes the sources and uses of funds of a firm at a point in time.

Assets

Economic resources that are owned or controlled by a company that have future economic benefit. Examples: Cash, Accounts Receivable, Inventory, Land, Buildings

Liabilities

Future obligations to pay cash, transfer assets or provide services to another party. Examples: Accounts Payable, Notes Payable, Wages Payable.

Owners’ Equity (Shareholders’ Equity)

The ownership interest in the net assets of an entity. Examples: Capital Stock, Preferred Stock, Retained Earnings.

Accounting Equation

Assets = Liabilities + Owners’ Equity or Uses of funds = Sources of funds

Current Assets

Assets that can be converted to cash within a year

Long-term Assets

Assets that cannot be easily converted to cash within a year

Current Liabilities

Liabilities that have maturities less than one year

Long-term Liabilities

Liabilities that have maturities longer than one year

Income Statement

Shows how much a company earned (not cash) over a period of time. Revenues - Expenses = Net Income

Revenues

Increase in a company’s resources from the sale of goods or services. Examples: Sales Revenue, Rent Revenue.

Expenses

Costs incurred in the normal course of business to generate revenues. Examples: Cost of Goods Sold, Utilities Expense, Wages Expense

Gains/Losses

Money made or lost outside of normal firm operations

Net Income or Loss

An overall measure of the performance of a company. Net Income = Revenues - Expenses + Gains - Losses

Statement of Shareholders’ Equity

A reconciliation of the beginning and ending balances of shareholders’ equity accounts. Main categories: Capital Stock, Retained Earnings, Treasury Stock, Other Comprehensive Income.

Statement of Cash Flows

The financial statement that describes an entity’s cash inflows and cash outflows during a period. Shows information about changes in the cash balance.

Operating Activities

Cash transactions that enter into the determination of net income

Investing Activities

Cash transactions involved in the purchase and sale of PPE, other long-term assets and making/collecting loans

Financing Activities

Cash transactions whereby resources are obtained or repaid to owners and creditors

Accounting Cycle

The procedure for analyzing, recording, summarizing, and reporting transactions of a business. Steps: 1. Analyze transactions 2. Record effects 3. Summarize effects by account 4. Prepare Reports

Transactions

An event that causes a change in balance sheet values

Account

An accounting record in which the results of transactions are accumulated

Double Entry Accounting

A method of accounting with Debits and Credits. - Debit = left, Credit = right - Account determines whether a debit is increase or decrease - Always at least one debit and one credit per transaction

Accrual Accounting

A system of accounting in which revenues and expenses are recorded as they are earned and incurred, not necessarily when cash changes hands. Makes Net Income a better measure of a firm's profitability.

Revenue Recognition

Companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods or services.

Matching Principle

All costs and expenses incurred in generating revenues must be recognized in the same period as the revenue. If you can’t match with revenue, then recognize it immediately.

Four Required Financial Statements

1. Balance Sheet 2. Income Statement 3. Statement of Shareholders' Equity 4. Statement of Cash Flows

Historical Cost

The original acquisition cost of an asset. Used because it's objective and provides faithful representation, though it may sacrifice some relevance compared to market value.

What are the three sections of the Statement of Cash Flows?

1. Operating Activities: Cash transactions related to net income 2. Investing Activities: Cash transactions for purchase/sale of assets 3. Financing Activities: Cash transactions with owners and creditors