Chapter 1 & 2: Business Decisions, Financial Accounting, and the Balance Sheet

Flashcards covering key definitions, equations, financial statements, GAAP standards, and transaction analysis from Chapters 1 and 2 notes.

How is accounting defined in the lecture notes?

Accounting takes events, collects and records them, and makes sense of them to track inventory, manage bank accounts, and know if a business is making money.

What is the basic Accounting Equation?

$$\text{Assets} = \text{Liabilities} + \text{Equity}$$

How are assets defined in financial accounting?

Resources owned or controlled by the company that represent promises of future economic benefit to the company.

What is the difference between Accounts Receivable (A/R) and Notes Receivable (N/R)?

Accounts Receivable represents money owed to the company by someone else, whereas Notes Receivable is similar but involves a formal loan agreement.

How are liabilities defined in financial accounting?

Debts, promises to provide services, resources, or money to others, and claims on company assets made by external parties.

What are the two main components of Equity?

Contributed capital (also called common stock) and retained earnings.

What is contributed capital?

Money or assets given directly from the company's owners to the company itself.

What is the formula to calculate Net Income?

$$\text{Revenue} - \text{Expenses} = \text{Net Income}$$

How do expenses and dividends affect retained earnings?

Both expenses and dividends decrease retained earnings.

What are the four basic financial statements in order of preparation?

1. Income Statement, 2. Statement of Retained Earnings, 3. Balance Sheet, 4. Statement of Cash Flows.

What is the purpose of the Income Statement?

To report a company's Net Income ($\text{Revenues} - \text{Expenses}$) generated over a period of time.

What does the Statement of Retained Earnings report?

It reports the way that net income and dividends impacted a company's equity during the period.

What does the Balance Sheet report?

It reports the amount of assets, liabilities, and equity that a company has at a specific point in time.

What three activity categories are used on the Statement of Cash Flows?

Operating, Investing, and Financing activities.

Who are the four primary external users of financial statements?

Investors, creditors (lenders), directors, and the government.

What four qualities make financial information useful?

Financial information is useful when it is Timely, Verifiable, Comparable, and Understandable.

What is an audit in accounting?

An audit is the verification process used to confirm that financial information is true.

What does GAAP stand for and which organization creates it?

GAAP stands for Generally Accepted Accounting Principles, which is created by FASB (Financial Accounting Standards Board).

What are the two ways investors make money from buying a company's stock?

Receiving dividends and stock price growth over time.

What is the equation for calculating Ending Retained Earnings?

$$\text{Beginning Retained Earnings} + \text{Net Income} - \text{Dividends} = \text{Ending Retained Earnings}$$

What is an account in financial accounting?

The record of all increases and decreases in an individual asset, liability, equity, revenue, expense, or dividend.

What is the duality of effects in transaction analysis?

The principle that every transaction impacts the Accounting Equation such that what happens to one side must maintain balance across the equation.

What is the difference between Accounts Payable and Notes Payable?

Accounts Payable arises from receiving something physical (like an item) with a promise to pay later, while Notes Payable is a formal agreement creating debt typically for receiving cash.

What does buying or selling something 'on account' mean?

It means promised to pay or receive payment at a later date.