Accounting
A system of maintaining records of a company's operations and communicating that information to decision makers.
Accounting Equation
Equation that shows a company's resources (assets) equal creditors' and owners' claims to those resources (liabilities and stockholders' equity) Assets=Liabilities+Stockholders' Equity.
Assets
Resources of a company.
Auditors
Trained individuals hired by a company as an independent party to express a professional opinion of the conformity of that company's financial statements with GAAP.
Balance Sheet
A financial statement that presents the financial position of the company on a particular date.
Comparability
The ability of users to see similarities and differences between two different business activities.
Consistency
The use of similar accounting procedures either over time for the same company, or across companies at the same point in time.
Corporation
An entity that is legally separate from its owners.
Cost Constraint
Financial accounting information is provided only when the benefits of doing so exceed the costs.
Decision Usefulness
The ability of the information to be useful in decision making.
Dividends
Distributions by a corporation to its stockholders.
Economic entity assumption
All economic events with a particular economic entity can be identified.
Ethics
A code or moral system that provides criteria for evaluating right and wrong behavior.
Expenses
Costs of providing products and services.
Faithful representation
Accounting information that is complete, neutral, and free from error.
Financial accounting
Measurement of business activities of a company and communication of those measurements to external parties for decision-making purposes.
Financial Accounting Standards Board (FASB)
An independent, private body that has primary responsibility for the establishment of GAAP in the United States.
Financial statements
Periodic reports published by the company for the purpose of providing information to external users.
Generally accepted accounting principles (GAAP)
The rules of financial accounting.
Going concern assumption
In the absence of information to the contrary, a business entity will continue to operate indefinitely.
Income statement
A financial statement that reports the company's revenues and expenses over an interval of time.
International Accounting Standards Board (ISAB)
An international accounting standard-setting body responsible for the convergence of accounting standards worldwide.
International Financial Reporting Standards (IFRS)
The standards being developed and promoted by the International Accounting Standards Board.
Liabilities
Amounts owed to creditors.
Monetary unit assumption
A unit or scale of measurement can be used to measure financial statement elements.
Net income
Difference between all revenues and all expenses for the period.
Partnership
Business owned by two or more persons.
Periodicity assumption
The economic life of an enterprise (presumed to be indefinite) can be divided into artificial time periods for financial reporting.
Relevance
Accounting information that possesses confirmatory value and/or predictive value.
Retained earnings
Cumulative amount of net income earned over the life of the company that has been kept (retained) in the business rather than distributed to stockholders as dividends (not retained).
Revenues
Amounts earned from selling products or services to customers.
Sarbanes-Oxley Act (SOX)
Formally titled the Public Company Accounting Reform and Investor Protection Act of 2002, this act provides regulation of auditors and the types of services they furnish to clients, increases accountability of corporate executives, addresses conflicts of
Sole proprietorship
A business owned by one person.
Statement of cash flows
A financial statement that measures activities involving cash receipts and cash payments over an interval of time.
Statement of stockholders' equity
A financial statement that summarizes the changes in stockholders' equity over an interval of time.
Stockholders' equity
Stockholders', or owners', claims to resources, which equal the difference between total assets and total liabilities.
Timeliness
Information being available to users early enough to allow them to use it in the decision process.
Understandability
Users must understand the information within the context of the decision they are making.
Verifability
A consensus among different measurers.
Based on the introductory section of this chapter, which course is most like financial accounting?
Foreign language
Financial accounting serves which primary function(s)?
a. Measures business activities.
b. Communicates business activities to interested parties.
Resources of a company are referred to as:
Assets
Amounts earned from sales of products or services are referred to as:
Revenues
Which financial statement conveys a company's ability to generate profits in the current period?
Income statement
Which financial statement shows that a company's resources equal claims to those resources?
Balance sheet
Why does financial accounting have a positive impact on our society?
It allows investors and creditors to redirect their resources to successful companies and away from unsuccessful companies.
The body of rules and procedures that guide the measurement and communication of financial accounting information is known as:
Generally Accepted Accounting Principles (GAAP).
What is a benefit to a career in accounting?
High salaries, wide range of job opportunities, and high demand for accounting graduates
What are the two fundamental qualitative characteristics identified by the Financial Accounting Standards Board's (FASB) conceptual framework?
Relevance and faithful representation
Describe the two primary functions of financial accounting.
The functions of financial accounting are to measure business activities of a company and to communicate information about those activities to investors and creditors and other outside users for decision-making purposes.
Understand the business activities that financial accounting measures.
The measurement role of accounting is to create a record of the activities of a company. To make this possible, a company must maintain an accurate record of its assets, liabilities, stockholders' equity, revenues, expenses, and dividends.
Determine how financial accounting information is communicated through financial statements.
The income statement compares revenues and expenses for the current period to assess the company's ability to earn a profit from running its operations.
The statement of stockholders' equity reports information related to changes in common stock and retai
Describe the role that financial accounting plays in the decision-making process.
Financial accounting serves an important role by providing information useful in investment and lending decisions.
No single piece of company information better explains companies' stock price performance than does financial accounting net income. A compa
Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting.
The rules of financial accounting are called generally accepted accounting principles (GAAP). The Financial Accounting Standards Board (FASB) is an independent, private body that has primary responsibility for the establishment of GAAP in the United State
Identify career opportunities in accounting
Because of the high demand for accounting graduates, the wide range of job opportunities, and increasing salaries, this is a great time to obtain a degree in accounting.
Explain the nature of the conceptual framework used to develop generally accepted accounting principles.
The conceptual framework provides an underlying foundation for the development of accounting standards and interpretation of accounting information.
To be useful for decision making, accounting information should have relevance and faithful representation