Chapter 1 – Introduction to Financial Accounting

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Accounting
process of identifying, measuring, and communicating financial information to help people make economic decisions
Accounting Equation
Assets = Liabilities + Equity
American Institute of Certified Public Accountaints (AICPA)
professional organization of CPAs in the USA
Assets
resource owned by the company that is expected to provide the company future economic benefits
Audited
financial statements are reviewed by an independent party
Balance Sheet
financial report based on the accounting equatiion that lists a company’s assets, liabilities, and equity at a given point in time
Board of Directors
governing body of a corporation elected by the shareholders
Conceptual Framework
guidelines developed by FASB to provide structure for considering future standards, as well as to guide accountants in areas where standards do not exist
Corporation
business organization that is a separate legal entity from its owners; characterized by a large number of owners who own shares of equity and who are not involved in managing day-to-day operations of the company
Cost of goods sold
expense reflecting the cost of merchandise or manufactured products sold to customers
Creditors
those to whom a company owes money; the people who provide debt financing
Debt-to-Equity Ratio
common measure of financial leverage = total liabilities divided by stockholder’s equity
Disclosure
act of providing financial and nonfinancial information to external users
Economic Consequences
issues resulting from accounting changes
Expense
outflow or use of assets, including costs of products and services sold, operating costs, and interest on debt, to generate revenue
Feedback Value
characteristic of information that enables users to confirm or correct prior expectations
Financial Accounting
process of recording, summarizing, and analyzing financial transactions designed primarily for decision makers OUTSIDE of the company
Financial Accounting Standards Board (FASB)
standard-setting organization which publishes accounting standards governing the preparation of financial reports
Financing Activities
methods companies use to fund investment resources
Generally Accepted Accounting Principles (GAAP)
set of standards and procedures accountants have developed that apply to the prepartion of financial statements
Income
revenue minus expenses; it is also the increase in net assets resulting from the company’s operations
Income Statement
financial report on operating activities that lists revenues less expenses OVER A PERIOD OF TIME, yielding a company’s net income
Internal Controls
policies and procedures used to protect assets, ensure reliable accounting, promote efficient operations, and urge adherence to company policies
Investing Activities
methods companies use to acquire and dispose of assets in the course of production and sales
Liabilities
probable future economic sacrifice resulting from a past or current event
Managerial Accounting
process of accounting designed for decision makers WITHIN the company
Neutrality
characteristic of information that is free from any bias
Operating Activities
methods companies use to produce, promote, and sell its products and services
Partnership
form of business entity characterized by two or more owners who are also usually involved in managing the business
Planning Activities
process of identifying a company’s goals, and the strategies adopted to reach those goals
Predictive Value
characteristic of information referring to its ability to increase the accuracy of a forecast
Profitability
ability of a company to generate net income
Public Company Accounting
Board established by Sarbanes-Oxley Act to approve auditing standards and monitor the quality of financial statements and audits
Representational Faithfulness
characteristic of accounting information refering to the degree with which is reclects the underlying economic events it purports to measure
Retained Earnings
earned capital, the cumulative net income and loss, of the company that has not been paid to shareholders as dividends
Return on Equity
the ultimate measure of performance from the shareholders perspective, computed as net income divided by average equity
Revenue
increase in equity resulting from the sale of goods and services to customers
Risk
uncertainty of expected return
Sarbanes Oxley Act
act passed in 2002 which requires a company’s CEO and CFO to personally sign a statement attesting to the accuracy of financial statements
Securities Exchange Commission
created by the 1934 Securities Act to regulate the issuance and trading of securities
Sole Proprietorship
form of business characterized by a single owner who typically manages the daily operations
Solvency
ability of a company to meet obligations, mainly to creditors
Statement of Cash Flows
financial report that identifies net cash flows into and out of a company from operating, investing, and financing activities over a period of time
Statement of Stockholders Equity
financial statement that reports on changes in key equity accouns over a period of time
Stockholders
owners of a corporation
Suppliers
providers of merchandise for resale or materials needed for operating activities
Timeliness
characteristic of information that is received by decision makers before it loses its capacity to influence decisions
Verifiability
characteristic of accounting information referring to the ability of an independent auditor to reproduce the accounting information by examining the underlying economic events and transactions
Return on Equity Equation
Net Income / Average Stockholders’ Equity
Debt-to-Equity Equation
Total liabilities / Total Stockholders’ Equity
Categories: Financial Accounting