Principles of Accounting AC 111 Chapter 1 Vocab

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Accounting

"an information system that measures, processes, and communicates financial information about an economic entity"

Business

"an economic unit that aims to sell goods and services to customers at prices that will provide an adequate return to its owners"

Profitability

"the ability to earn enough income to attract and hold investment capital"; commonly measured in terms of earnings or income

Liquidity

"the ability to have enough cash to pay debts when they are due"; commonly measured in terms of cash flows

Operating Activities

"selling goods and services to customers, employing managers and workers, buying and producing goods and services, and paying taxes."

Investing Activities

"spending the capital a company receives in productive ways that will help it achieve its objectives" i.e. buying land, buildings, equipment

Financing Activities

"obtaining adequate funds, or capital, to begin operations and to continue operating" i.e. obtaining capital from creditors, etc.

Performance Measure

an important function of accounting indicating whether managers are achieving their business goals and whether business activities are well managed

Financial Analysis

the evaluation and interpretation of financial statements and performance measures

Management Accounting

provides INTERNAL decision makers with information about operating, investing, and financing activities

Financial Accounting

generates reports and communicates them to EXTERNAL decision makers so they can evaluate how well the business has achieved its goals

Financial Statements

reports generated by Financial Accounting; a central feature of accounting

Management Information System (MIS)

the interconnected subsystems that provide the info needed to run a business; i.e. the accounting information system is the most important

Ethics

"a code of conduct that applies to everyday life; it addresses the question of whether actions are right or wrong"

Fraudulent financial reporting

"the intentional preparation of misleading financial statements"

Sarbanes - Oxley Act

passed by Congress in 2002 to regulate financial reporting and the accounting profession

Management

"the people who are responsible for operating a business and meeting its goals of profitability and liquidity"; one of the most important users of accounting information

Basic Management Functions

Financing, investing, producing, marketing, managing employees, providing information to decision makers

Direct Financial Interest

includes those such as creditors and investors

Creditors and Investors

the primary external users of accounting information

Managers

internal users of accounting information

Indirect Financial Interest

includes tax authorities, regulatory agencies, as well as other groups

Securities and Exchange Commission (SEC)

group set up by Congress to protect the public and regulate the issuing, buying and and selling of stocks in the USA

Questions to Ask to Make an accounting measurement:

What is measured? (Financial Accounting uses money to gauge the impact of business transactions)
When should the measurement be made?
What value should be placed on what is measured?
How should what is measured be classified?

Business Transactions

"economic events that affect a business's financial position"

Money Measure

the concept that all business transactions are recorded in terms of money

Exchange Rate

the value of one currency in terms of another

Separate Entity

a business that must be distinct from its owners, creditors, and customers; separate accounts

Sole Proprietorship

"a business owned by one person; the owner takes all the profits or losses of the business and is liable for all its obligations"; represents the largest # of businesses in the USA

Partnership

like a sole proprietorship but has more than one owner that share the profits or losses of the business accounting to a prearranged formula; all liable

Corporation

a business unit chartered by the state and legally separate from its owners (stockholders); owners enjoy limited liability

Financial Position

"a company's economic resources. . . and the claims against those resources at a particular time"

The Accounting Equation

Assets = Liabilities + Owner's Equity
or A = L + OE

Assets

"the economic resources of a company that are expected to benefit the company's future operations"; (can be monetary or non-monetary, physical or nonphysical)

Liabilities

"a business's present obligations to pay cash, transfer assets, or provide services to other entities in the future"

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