Chapter 1: Accounting in Action

  1. Accounting
    Consists of three basic activities --it identifies, records, and communicates the economic events of an organization to intrested users.
  2. Identifies 
    As a starting point to the accounting process, a company identifies the economic events relevent to its business. 
  3. Records 
    Once a company identifies economic events it records those events in order to provide a history of its financial activities .
  4. Communicates 
    It is done when the the economic events are identified and reported, it communicates the collected information to interested users by means of accounting reports.
  5. Bookkeeping
    Usually involves only the recording of economic events
  6. Internal Users 
    Internal users of accounting information are managers who plan, organize, and run the business.
  7. Managerial accounting
    Provides internal reports to help users make decisions about their companies.
  8. External Users 
    Are individuals and organizations outside the company who want financial information about the company
  9. investors (owners)
    Use accounting information to decide whether to buy, hold, or sell ownership shares of the company
  10. Creditors (such as suppliers and bankers)
    Use accounting information to evaluate the risks of granting credit or lending money.
  11. Financial Accounting
    Provides economic and financial information for investors, creditors, and other external users.
  12. Taxing Authorities 
    Taxing authorities such as the Internal Revenue Service, want to know whether the company applies with tax laws.
  13. Regulatory Agencies
    like the Securities and Exchange Commission or the Federal Trade Commission, want to know whether the company is operating within prescribed rules.
  14. Sarbanes-Oxley Act (SOX)
    Stops rigged financial records
  15. Ethics
    Honest, or dishonest, fair or not fair
  16. Generally Accepted Accounting Principles (GAAP)
    Common standards that indicate how to report economic events.
  17. Financial Accounting Standards Board (FASB)
    A private organization that establishes generally accepted accounting principles in the United States (GAAP).
  18. Securities and Exchange Commission (SEC)
    A governmental agency that oversees U.S. financial markets and accounting standard-setting bodies.
  19. International Accounting Standards Board (IASB)
    An accounting standard-setting body that issues standards adopted by many countries outside the United States.
  20. Convergence
    The process of reducing the differences between US GAAP and IFRS.
  21. Relevance
    means that financial information is capable of making a difference in a decision.
  22. Faithful Representation
    means that the numbers and descriptions match what really existed or happened-they are factual.
  23. Historical Cost Principle (or cost principle)
    dictates that companies record assets at their cost.
  24. Fair Value Principle
    states that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability).
  25. Monetary Unit Assumption
    requires that companies include in the accounting records only transaction data that can be expressed in money terns.
  26. Economic Entity Assumption
    requires that the activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities.
  27. Proprietorship
    A business owned by one person
  28. Partnership
    A business owned by two or more persons associated as partners
  29. Corporation
    A business organized as a separate legal entity under state corporation law and having ownership divided into transferable shares of stock
  30. Assets
    resources a business owns
  31. Liabilities
    Claims of those whom the company owes money (creditors)
  32. Owner's Equity
    Claims of owners
  33. Accounts Payable 
    Campus Pizza, for instance, purchases of cheese, sausage, flour, and beverages on credit from suppliers are obligations called accounts payable.
  34. Note Payable 
    money borrowed to purchase, for example a pizza delivery truck.
  35. Residual Equity 
    what owners equity is often referred to
  36. Investments by owner
    are assets the owner puts into the business
  37. Revenues
    gross increase in owner's equity resulting from business activities entered into for the purpose of earning income.
  38. Drawings
    An owner withdrawing cash from the business for personal use.
  39. Expenses
    cost of assets consumed or services used in the process of earning revenue.
  40. Expanded Accounting Equation
    Assets = Liabilities + Owner's Capital - Owner's Drawings + Revenues - Expenses
  41. Basic Accounting Equation
    Assets = Liabilities + Owner's Equity
  42. Transactions (business transactions)
    business's economic events recorded by accountants.
  43. External Transactions 
    • involve economic events between the company and some outside enterprise
    • ex: payment of monthly rent to landlord, and sale of pizzas to customers
  44. Internal Transactions
    • economic events that occur entirely within one company
    • ex: use of cooking and cleaning supplies
  45. Income Statement
    revenues and expenses and resulting net income or net loss for a specified period of time
  46. Owner'S Equity Statement
    summarizes the changes in owner's equity for a specific period of time
  47. Balance Sheet
    reports of assets, liabilities, and owner's equity at a specific date
  48. Statement of Cash Flows
    summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time
  49. Net Income
    results when revenues exceed expenses
  50. Net Loss
    occurs when expenses exceed revenues
  51. Public Accounting
    offer expert service to the general public
  52. Auditing
    a CPA examines company financial statements and provides an opinion as to how accurately the financial statements present the company's results and financial position
  53. Taxation
    tax advice and planning, preparing tax returns, and representing clients before governmental agencies such as the IRS
  54. Managerial Consulting
    It ranges from installing basic accounting software or highly complex enterprise resource planning systems, to perform support services for major marketing projects and merger and acquisition activities.
  55. Private (or managerial) accounting
    involved in activities such as cost accounting (finding the cost of producing specific products), budgeting, accounting information system design and support, and tax planning and preparation
Card Set
Chapter 1: Accounting in Action
1.1 Identify the Activities and Users Associated with Accounting 1.2 Explain the building blocks of accounting: ethics, principles, and assumptions. 1.3 State the accounting equation, and define its components. 1.4 Analyze the effects of business transactions on the accounting equation 1.5 Describe the four financial statements and how the are prepared.