AC105 L2

What is accounting often referred to as?

The language of business

Why isn’t accounting always precise?

It involves estimates, judgment, flexibility, and multiple valid methods

Who are the main external users of accounting information?

Investors, creditors, government authorities, competitors, employees

Who are the main internal users of accounting information?

Managers, board members, HR, marketing teams

What is the focus of financial accounting vs. management accounting?

Financial accounting serves external users; management accounting supports internal decision-making

Who sets accounting standards internationally?

IASB (International Accounting Standards Board)

What is the U.S. equivalent of IASB?

FASB (Financial Accounting Standards Board)

What is the valuation role of accounting?

Helping investors predict future cash flows by providing value-relevant information

What is the stewardship role of accounting?

Monitoring and aligning managers’ actions with shareholders’ interests

In which type of business is the owner personally liable for debts?

Sole proprietorship or partnership

What protects shareholders from personal liability in a limited company?

Limited liability

What does the historical cost convention state?

Assets should be recorded at acquisition cost, not current market value

What is the fair value convention?

Assets and liabilities are measured at current market values

What does the going concern convention assume?

The business will continue operations for the foreseeable future

What does the prudence (conservatism) convention require?

Losses are recognized immediately; gains only when realized

What does the dual aspect convention mean?

Every transaction has two effects on the financial position

What is the accruals (matching) convention?

Revenues and expenses are recorded when earned/incurred, not when cash changes hands

What does the business entity convention state?

Business and owner are separate entities

What does the money measurement convention require?

Only items measurable in monetary terms can be recorded

What are the two fundamental characteristics of useful information?

Relevance and faithful representation

What are the enhancing qualitative characteristics of useful financial info?

Comparability, verifiability, timeliness, understandability

What does “substance over form” relate to?

Faithful representation

Which characteristic is violated if R&D is treated inconsistently across firms?

Comparability

What does the balance sheet show?

Assets, liabilities, and equity at a point in time

What does the income statement report?

Revenues minus expenses over a period (financial performance)

What does the cash flow statement report?

Cash inflows and outflows, categorized into operating, investing, and financing activities