Financial & Managerial Accounting: Chapter 1

Accounting
The information system that measures business activities, processes the information into reports, and communicates the results to decision makers.
Financial Accounting
The field of accounting that focuses on providing information for external decision makers.
Managerial Accounting
The field of accounting that focuses on providing information for internal decision makers.
Creditor
Any person or business to whom a business owes money.
Certified Public Accountant (CPAs)
Licensed professional accountants who serve the general public.
Controllers
Compile financial statements, interact with auditors, and oversee regulatory reporting.
Financial analysts
Review financial data and help to explain the story behind the numbers.
Business systems analysts
Accounting knowledge to create computer systems.
Tax accountants
Help companies navigate tax laws.
Auditors
Perform reviews of companies to ensure compliance to rules and regulations.
Cost accountants
Typically work in a manufacturing business. Help analyze accounting data.
Financial Accounting Standards Board (FASB)
The private organization that oversees the creation and governance of accounting standards in the United States.
Securities and Exchange Commission (SEC)
U.S. governmental agency that oversees the U.S. financial markets.
Generally Accepted Accounting Principles (GAAP)
Accounting guidelines, currently formulated by the Financial Accounting Standards Board (FASB); the main U.S. accounting rule book.
Economic Entity Assumption
An organization that stands apart as a separate economic unit.
Stockholder
A person who owns stock in a corporation.
Sole Proprietorship
A business with a single owner.
Partnership
A business with two or more owners and not organized as a corporation.
Corporation
A business organized under state law that is a separate legal entity.
Limited-Liability Company (LLC)
A company in which each member is only liable for his or her own actions.
Cost Principle
A principle that states that acquired assets and services should be recorded at their actual cost.
Going Concern Assumption
Assumes that the entity will remain in operation for the foreseeable future.
Monetary Unit Assumption
The assumption that requires the items on the financial statements to be measured in terms of a monetary unit.
International Financial Reporting Standards (IFRS)
A set of global accounting guidelines, formulated by the International Accounting Standards Board (IASB).
International Accounting Standards Board (IASB)
The private organization that oversees the creation and governance of International Financial Reporting Standards (IFRS).
Audit
An examination of a company’s financial statements and records.
Sarbanes-Oxley Act (SOX)
Requires companies to review internal control and take responsibility for the accuracy and completeness of their financial reports.
Accounting Equation
The basic tool of accounting measuring the resources of the business (what the business owns or has control of) and the claims to those resources (what the business owes to creditors and to the owners). Assets = Liabilities + Equity.
Assets
Economic resources that are expected to benefit the business in the future. Something the business owns or has control of.
Liabilities
Debts that are owed to creditors.
Equity
The owners’ claim to the assets of the business.
Contributed Capital
Owner contributions to a corporation.
Revenues
Amounts earned from delivering goods or services to customers.
Expenses
The cost of selling goods or services.
Dividend
A distribution of a corporation’s earnings to stockholders.
Common Stock
Represents the basic ownership of a corporation.
Retained Earnings
Capital earned by profitable operations of a corporation that is not distributed to stockholders.
Net Income
The result of operations that occurs when total revenues are greater than total expenses.
Net Loss
The result of operations that occurs when total expenses are greater than total revenues.
Transaction
An event that affects the financial position of the business and can be measured reliably in dollar amounts.
Accounts Payable
A short-term liability that will be paid in the future.
Accounts Receivable
The right to receive cash in the future from customers for goods sold or for services performed.
Financial Statements
Business documents that are used to communicate information needed to make business decisions.
Income Statement
Reports the net income or net loss of the business for a specific period.
Statement of Retained Earnings
Reports how the company’s retained earnings balance changed from the beginning to the end of the period.
Balance Sheet
Reports on the assets, liabilities, and stockholders’ equity of the business as of a specific date.
Statement of Cash Flows
Reports on a business’s cash receipts and cash payments for a specific period.
Return on Assets (ROA)
Measures how profitably a company uses its assets. Net income / Average total assets.
Assets
Economic resources that are expected to benefit the business in the future. Something the business owns or has control of.
Certified Management Accountants (CMAs)
Certified professionals who specialize in accounting and financial management knowledge. they typically work for a single company.
Why is accounting important?
It’s the language of business.

Accounting is used by decision makers including individuals, businesses, investors, creditors, and taxing authorities.

Accounting can be divided into two major fields: financial accounting and managerial accounting.

Financial accounting is used by external decision makers and managerial accounting is used by internal decision makers.

All businesses need accountants. Accountants work in private, public, and governmental jobs.

Accountants can be licensed as either a certified public accountant (CPA) or certified management accountant (CMA).

What are the organizations and rules that govern accounting?
Generally Accepted Accounting Principles (GAAP) are the rules that govern accounting in the United States.

The Financial Accounting Standards Board (FASB) is responsible for the creation and governance of accounting standards (GAAP).

Economic entity assumption: Requires an organization to be a separate economic unit such as a sole proprietorship, partnership, corporation, or limited-liability company.

Cost principle: Acquired assets and services should be recorded at their actual cost.

Going concern assumption: Assumes that an entity will remain in operation for the foreseeable future.

Monetary unit assumption: Assumes financial transactions are recorded in a monetary unit.

What is the accounting equation?
Assets = Liabilities + Equity

Assets: Items the business owns or controls (examples: cash, furniture, land).

Liabilities: Items the business owes (examples: accounts payable, notes payable, salaries payable).

Equity: Stockholders’ claims to the assets through contributed capital and retained earnings (examples: common stock, dividends, revenues, expenses).

How do you analyze a transaction?
A transaction affects the financial position of a business and can be reliably measured.

Transactions are analyzed using three steps:

Step 1: Identify the accounts and account type (Asset, Liability, or Equity).

Step 2: Decide whether each account increases or decreases.

Step 3: Determine whether the accounting equation is in balance.

How do you prepare financial statements?
Financial statements are prepared in the following order:

1. Income Statement:

Reports the net income or net loss of a business for a specific period.
Revenues – Expenses = Net Income or Net Loss.

2. Statement of Retained Earnings:

Reports on the changes in retained earnings for a specific period.

Beginning Retained Earnings = Net Income – Dividends – Net Loss = Ending Retained Earnings.

3. Balance Sheet:

Reports on an entity’s assets, liabilities, and stockholders’ equity as of a specific date.

Assets = Liabilities + Stockholders’ Equity.

4. Statement of Cash Flows:

Reports on a business’s cash receipts and cash payments during a period.

Includes three sections: Cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.

How do you use financial statements to evaluate business performance?
Income statement evaluates profitability.

Statement of retained earnings studies the amount of earnings that were kept and reinvested in the company.

Balance sheet details the economic resources the company owns as well as debts the company owes.

Statement of cash flows shows the change in cash.

Return on assets (ROA) = Net income / Average total assets.

Categories: Managerial Accounting