Accounting Fundamental: Chapter 1

  1. Why is accounting so important?
    We live in an information age in which accounting information impacts us all
  2. What is accounting?
    Accounting is an information and measurement system that identifies, records, and communicates information about an organization’s business activities.
  3. Why is accounting called the language of business?
    Because all organizations set up an accounting information system to communicate data to help people make better decisions.
  4. Recordkeeping/bookkeeping
    the recording of transactions and events
  5. Accounting user groups
    • 1. External Users
    • 2. Internal Users
  6. External Users
    • -not directly involved in running the organization
    • -Ex. shareholders, investors, lenders, customers, lawyers
  7. Financial Accounting
    the area of accounting aimed at serving external users by providing them with general-purpose financial statements
  8. Managerial accounting
    area of accounting that serves the decision making needs of internal users
  9. Financial accounting focuses on the needs of____users
    Internal users
  10. Financial accounting focuses on the needs of____users
  11. Managerial accounting focuses on the needs of____users
    internal users
  12. Four areas of opportunity in Accounting
    • 1. Financial
    • 2. Managerial
    • 3. Taxation
    • 4. Accounting-related
  13. For information to be useful it must be ____
  14. Ethics
    beliefs that separate right from wrong
  15. Internal controls
    • -procedures to protect assets, uphold company policies
    • -to prevent fraud companies set these up
  16. Key to stopping fraud is
  17. Fraud Triangle: Three factors that push a person to commit fraud
    • 1. Opportunity: Low-risk of getting caught
    • 2. Pressure: or incentive to commit fraud
    • 3. Rationalization: justifies fraud or does not see its criminal nature
  18. Sarbanes-Oxley (SOX)
    • -requires that public companies apply both accounting oversight and stringent internal controls. (more transparency, accountability and truthfulness in reporting transactions) 
    • -Congress passed the act to help curb financial abuses at companies that issue their stock to the public
    • -Companies in the past have inflated their revenues and income and hid debt
  19. Dodd-Frank Wall Street Reform and Consumer Protection Act
    • Designed to:
    • 1. Promote accountability and transparency in the financial system
    • 2. put an end to the notion of "too big to fail"
    • 3. protect taxpayer by ending bailouts
    • 4. protect consumers from abusive financial services
  20. GAAP
    • -Generally Accepted Accounting Principles 
    • -Aims to make information relevant, reliable, and comparable
  21. General Principles and name the 4
    • -the basic assumptions, concepts, and guidelines for preparing financial statements.
    • -stem from long-used accounting practices.
    • 1.Measurement
    • 2.Revenue recognition
    • 3.Full disclosure
    • 4.Expense recognition
  22. Measurement principle (cost principle)
    • -accounting information is based on actual cost
    • -actual cost is considered objective
    • -Ex. a company pays $500 for equipment. it must be recorded at $500 even if the owner thinks the equipment is worth $700
  23. Expense recognition principle (matching principle)
    • -a company must record the expenses incurred to generate the revenue reported
    • -Ex. Rent costs of office space
  24. Revenue recognition principle
    • -revenue is recognized when
    • 1. goods and services are provided to customers
    • the amount expected to be received by the customer
    • -when earned
  25. to Recognize =
    to record
  26. Specific Principles
    • -detailed rules used in reporting business transactions and events.
    • -arise more often from the rulings of authoritative groups.
  27. Full disclosure principle
    - a company is required to report the details behind financial statements that would impact user's decisions
  28. Going-Concern Assumption
    • -Assumption that the business will continue operating instead of being closed or sold
    • -a company does not the intention of liquidating its assets and closing down
  29. Monetary Unit Assumption
    • -transactions and events are expressed in monetary or money unit
    • -Ex. US dollar
  30. Business Entity Assumption
    -all business entities should be accounted for separately, including its owner
  31. Time Period Assumption
    -presumes that the life of a company can be divided into time periods, such as months and years
  32. Materiality
    • -the ability of information to influence decisions
    • -Only information that would influence the decisions of a reasonable person need to be disclosed
  33. Cost benefit constraint
    • -information disclosed by an entity must have benefits to the user that are greater than the costs
    • -The benefits of the information disclosed must be greater than the costs of providing the information.
  34. Name the 4 Accounting Principles
    • 1. Measurement principle
    • 2. Revenue recognition principle
    • 3. Expense recognition principle 
    • 4. Full disclosure principle
  35. Name the 4 Accounting Assumptions
    • 1. Going concern assumption
    • 2. Monetary unit assumption
    • 3. Time period assumption
    • 4. Business entity assumption
  36. Name the 2 Accounting constraints
    • 1. Materiality 
    • 2. cost-benefit
  37. Assets
    • -resources a company owns or controls
    • -expected to yield benefits
    • -Ex. musical instruments for a rock band or land for a vegetable grower
    • -cash, supplies, equipment, land and accounts receivable
  38. Receivable
    an asset that promises a future inflow of resources
  39. Liabilities
    • -creditors claim on assets
    • -obligations to provide assets, products, or services to others
  40. Payable
    • -liability that promises a future out-flow of resources.
    • -Ex. wages payable to workers, accounts payable to suppliers, loans payable to banks
  41. Equity
    -the owner's claim on assets 

    =  assets - liabilities
  42. The Accounting Equation
    • Assets = Liabilities + Equity
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  43. The Accounting Equation (expanded)
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  44. What do owner's withdrawals do to equity?
    decreases it
  45. What do expenses do to equity?
    descreases it
  46. Four parts of Equity
    • 1. Owner, Capital (increases)
    • -Owner contributions, investments
    • 2. Owner, Withdrawals (decreases) 
    • -personal use outflows of cash
    • 3. Revenue (increases) 
    • -sales of products, services, facilities rented to others, consulting services
    • 4. Expenses (decreases
    • -cost of providing products and services, Ex. costs of employee time, use of supplies, advertising, utilities, insurance fees
  47. Transaction 1: Chas Taylor invests $30,000 to start a company

    The accounts involved are:
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  48. Transaction 2: Company purchased supplies paying $2,500 cash

    The accounts involved are:
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  49. Transaction 3: Company purchased equipment paying $26,000 cash

    The accounts involved are:
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  50. Transaction 4: Company purchased supplies of $7,100

    The accounts involved are:
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  51. Transaction 5: Company provided consulting services to a customer and received $4,200 cash right away

    The accounts involved are:
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  52. Transaction 6: Company paid rent of $1,000 and salaries of $700 to employees

    The accounts involved are:
  53. Transaction 8: Provided consulting services of $1600 and rents facilities for $300 to a customer for credit 

    The accounts involved are:
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  54. Transaction 10: Company pays $900 as partial payment for supplies purchased in transaction 4. 

    The accounts involved are:
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  55. The 4 Financial Statements
    • 1. Income statement
    • 2. Statement of owner's equity 
    • 3. Balance sheet
    • 4. Statement of cash flows
  56. Income statement
    describes a company's revenues and expenses and computes net income or loss over a period of time.

    •  Revenue
    • -Expenses
    •  Net Income

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    • *Owner's investments and withdrawals are not part of income.
  57. State of owner's equity
    explains changes in owner's equity from owner investments, net income (or loss), and any withdrawals over a period of time.

    •  Beg. capital
    • +Owner investments
    • +Net income
    •  -Withdrawals
    • End. capital

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  58. Balance sheet
    describes a company's financial position(types and amounts of assets, liabilities, and equity) at a point in time.

    • Assets = Liabilities + Equity
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  59. Statement of cash flows
    identifies cash inflows (receipts) and cash outflows (payments) over a period of time

    • +/- Operating C.F
    • +/- Investing C.F
    • +/- Financing C.F
    •       Change in cash

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  60. Net income
    occurs when revenue exceeds expenses
  61. Net loss
    occurs when expenses exceed revenue
  62. Return on assets equation
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Card Set
Accounting Fundamental: Chapter 1