Chapter 1: Accounting in Business
Terms in this set (128)
An information and measurement system that identifies, records, and communicates relevant, reliable, and comparable information about an organization's business activities.
__________ business activities requires that we select relevant transactions and events. Examples are the sale of iPhones by Apple and the receipt of ticket money by TicketMaster.
__________ business activities requires that we keep a chronological log of transactions and events measured in dollars.
__________ business activities requires that we prepare accounting reports such as financial statements, which we analyze and interpret.
The recording of transactions and events, either manually or electronically.
Language of Business
Accounting is called the __________ because all organizations set up an accounting information system to communicate data to help people make better decisions.
Users of accounting information who are not directly involved in running the organization. They include shareholders (investors), lenders, directors, et. al. Yet their business decisions depend on information that is reliable, relevant, and comparable.
The area of accounting aimed at serving external users by providing them with general-purpose financial statements.
The term __________ refers to the broad range of purposes for which external users rely on these statements.
External users who loan money or other resources to an organization. Include banks, savings and loans, co-ops, and mortgage and finance companies. They look for information to help them assess whether an organization is likely to repay its loans with interest.
External users who are owners of a corporation. They use accounting reports in deciding whether to buy, hold, or sell stock.
External users who are typically elected to a board of directors to oversee their interests in an organization. Since they are responsible to shareholders, their information needs are similar.
External (Independent) Auditors
External users who examine financial statements to verify that they are prepared according to generally accepted accounting principles.
Nonexecutive Employees and Labor Unions
__________ and __________ are external users who use financial statements to judge the fairness of wages, assess job prospects, and bargain for better wages.
External users who have legal authority over certain activities of organizations (e.g., the Internal Revenue Service, utility boards, and securities regulators.
Voters, Legislators, and Government Officials
External users who use accounting information to monitor and evaluate government receipts and expenses.
External users who help nonprofit organizations use accounting information to evaluate the use and impact of their donations.
External users who use accounting information to judge the soundness of a customer before making sales on credit.
External users who use financial reports to assess the staying power of potential suppliers.
Users of accounting information who are directly involved in managing and operating and organization; includes the CEO, the CFO, the chief audit executive (CAE), et. al. They use the information to help improve the efficiency and effectiveness of an organization.
The area of accounting that serves the decision making needs of internal users.
Research and Development (R&D) Managers
Internal users who need information about projected costs and revenues of any proposed changes in products and services.
Internal users who need to know what, when, and how much to purchase.
Human Resource (HR) Managers
Internal users who need information about employees' payroll, benefits, performance, and compensation.
Internal users who depend on information to monitor costs and ensure quality.
Internal users who need reports for timely, accurate, and efficient delivery of products and services.
Internal users who use reports about sales and costs to target consumers, set prices, and monitor consumer needs, tastes, and price concerns.
Internal users who require information on the costs and benefits of looking after products and services.
The majority of accounting opportunities are in __________, which are employees working for businesses.
__________ offers the next largest number of opportunities, which involve services such as auditing and tax advice.
Beliefs that distinguish right from wrong. They are accepted standards of good behavior.
Guidelines For Ethical Decision Making
The three __________ include identifying ethical concerns, analyzing options, and making ethical decisions.
Identify Ethical Concerns
The first guideline for ethical decision making. Use personal ethics to recognize an ethical concern.
The second guideline in ethical decision making. Consider all good and bad consequences.
Make Ethical Decisions
The third guideline in ethical decision making. Choose the best option after weighing all consequence.
A model created by a criminologist that asserts the following three factors must exist for a person to commit fraud: opportunity, pressure, and rationalization.
A component of the fraud triangle that states a person must envision a way to commit fraud with a low perceived risk of getting caught. Employers can directly reduce this risk. An example of some control on __________ is a pre-employment background screening.
A component of the fraud triangle that states a person must have some __________, or incentive, to commit fraud. Examples are unpaid bills and addictions.
A component of the fraud triangle that states a person who rationalizes fails to see the nature of the fraud or justifies the actions.
Procedures set up to protect company property and equipment, ensure reliable accounting reports, promote efficiency, and encourage adherence to company policies. Examples are good records, physical controls (locks, passwords, guards), and independent reviews.
Generally Accepted Accounting Principles (GAAP)
Financial accounting is governed by concepts and rules known as __________. They aim to make information relevant, reliable, and comparable.
Information that affects users decisions.
Information that is trusted by users.
Information that is helpful in contrasting organizations.
Securities and Exchange Commission (SEC)
In the United States, the __________, a government agency, has the legal authority to set GAAP. Also oversees the proper use of GAAP by companies that raise money from the public through issuances of their stock and debt.
U.S. SEC Registrants
Companies incorporated in the United States that issue their stock on U.S. exchanges.
Non-U.S. SEC Registrants
Companies incorporated under non-U.S. laws that issue their stock on U.S. exchanges.
Financial Accounting Standards Board (FASB)
The SEC has largely delegated the task of setting U.S. GAAP to the __________, which is a private-sector group that sets both broad and specific principles.
International Accounting Standards Board (IASB) and International Financial Reporting Standards (IFRS)
The __________, an independent group (consisting of individuals from many countries) issues __________ that identify preferred accounting practices.
Differences between U.S. GAAP and IFRS are decreasing as the FASB and IASB pursue a __________ processed aimed to achieve a single set of accounting standards for global use.
The FASB and IASB are attempting to converge and enhance the __________ that guides standard setting. It includes objectives, qualitative characteristics, elements, and recognition and measurement.
The peak component of the FASB framework which provide information useful to investors, creditors, and others.
A middle component of the FASB framework which require information that is relevant, reliable, and comparable.
A middle component of the FASB framework which define items that financial statements can contain.
Recognition and Measurement
The base component of the FASB framework which set criteria that an item must meet for it to be recognized as an element; and how to measure each element.
Principles and Assumptions
Accounting __________ (and __________ ) are of two types; general principles and specific principles.
The basic assumptions, concepts, and guidelines for preparing financial statements. They stem from long-used accounting principles.
Detailed rules used in reporting business transactions and events. They arise more often from rulings of authoritative groups.
Refers to the group of at least four basic principles; measurement, revenue recognition, expense recognition, and full disclosure.
Measurement Principle (Cost Principle)
The __________, also called the cost principle, usually prescribes that accounting information is based on actual cost (with a potential for subsequent adjustments to market).
Revenue Recognition Principle
Revenue (sales) is the amount received from selling products and services. The __________ provides guidance on when a company must recognize (record) revenue. A key to modern accounting.
Expense Recognition Principle (Matching Principle)
The __________, also called the matching principle, prescribes that a company record the expenses it incurred to generate the revenue reported. A key to modern accounting.
Full Disclosure Principle
The __________ prescribes that a company report the details behind financial statements that would impact user's decisions. Those disclosures are often in footnotes to the statements.
Refers to the group of four basic assumptions: going-concern, monetary unit, time period, and business entity.
Going Concern Assumption
The __________ means that accounting information reflects a presumption that the business will continue operating instead of being closed or sold.
Monetary Unit Assumption
The __________ means that we can express transactions and events in monetary, or money, units. Money is the common denominator of business.
Time Period Assumption
The __________ presumes that the life of a company can be divided into time periods, such as months and years, and that useful reports can be prepared for those periods.
Business Entity Assumption
The __________ means that a business is accounted for separately from other business entities, including its owner. The reason for this assumption is that separate information about each business is necessary for good decisions.
A business can take one of three __________: proprietorship, partnership, or corporation.
Sole Proprietorship (Proprietorship)
A __________ is a business owned by own person. The business is a separate entity for accounting purposes. However, the business is not a separate legal entity from its owner; maintains unlimited liability.
A __________ is a business owned by two or more people, called partners, which are jointly liable for tax and other obligations; at least three types of these businesses limit liability; LP, LLP, and LLC.
Corporation (C Corporation)
A __________ is a business legally separate from its owner or owners, meaning it is responsible for its own acts and debts. Separate legal status means that it can conduct business with the rights, duties, and responsibilities of a person.
Separate legal status also means that a corporation's owners, who are called __________, are not personally liable for corporate acts and debts.
A main disadvantage of a corporation is what's called __________—meaning that (1) the corporation income is taxed and (2) any distribution of income to its owners through dividends is taxed as a part of the owners' personal income, usually at the individual's income tax rate.
An __________, a corporation with special attributes, does not owe corporate income tax. Owners of these type of corporations report their share of corporate income with their personal income.
Ownership of all corporations is divided into units called __________.
Common Stock (Capital Stock)
When a corporation issues only one class of stock, we call it __________.
There are two basic __________ on financial reporting; materiality and cost-benefit.
The __________ prescribes that only information that would influence the decisions of a reasonable person need be disclosed. This constraint looks at both the importance and relative size if an amount.
The __________ prescribes that only information with benefits of disclosure greater than the costs of providing it need be disclosed.
Conservatism and Industry Practices
__________ and __________ are also sometimes referred to as accounting constraints.
Sarbanes-Oxley Act (SOX)
Congress passed the __________, also called the SOX, to help curb financial abuses at companies that issue their stock to the public. It requires that these public companies apply both accounting oversight and stringent internal controls. The desired results include more transparency, accountability, and truthfulness in reporting transactions.
__________ also must verify the effectiveness of internal controls.
To reduce the risk of accounting fraud, companies set up __________. Includes a companies owners, managers, employees, board of directors, and other important stakeholders, who work together to reduce the risk of accounting fraud and increase confidence in accounting reports.
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank)
Congress passed the __________ to (1) promote accountability and transparency in the financial system, (2) put an end to the notion "too big to fail," (3) protect the taxpayer by ending bailouts, and (4) protect consumers from abusive financial services.
A notable Dodd-Frank proposal is __________ from Section 404(b) of SOX for smaller public entities from the requirement to obtain an external audit on effectiveness of internal control over financial reporting.
A notable Dodd-Frank proposal is __________ for all members of the compensation committee (including additional disclosures); in the event of an accounting restatement, an entity must set policies mandating recovery ("clawback") of excessive incentive compensation.
A notable Dodd-Frank proposal which requires the SEC, when sanctions exceed $1 million, to pay a __________ between 10% and 30% of the sanction.
The relation of assets, liabilities, and equity is reflected in the __________:
Assets = Liabilities + Equity
Resources a company owns or controls. These resources are expected to yield future results. Examples are cash, supplies, equipment, and land, where each carries expected benefits.
What a company owes its nonowners (creditors) in future payments, products, or services. Examples are wages payable to workers, accounts payable to suppliers, notes payable to banks, and taxes payable to the government.
__________ is the owner's claim on assets, and is equal to assets minus liabilities. Also called net assets. Increases from owner investments (stock issuances) and revenues. Decreases from dividends and expenses.
Stockholders' Equity (Shareholders Equity)
Specifically, a corporation's equity—also called __________ — consists of four elements; common stock, dividends, revenues, and expenses.
__________, which is part of contributed capital, reflects inflows of resources such as cash and other net assets from stockholders in exchange for stock.
The outflow of resources such as cash and other assets to stockholders is called __________, which reduce equity. A part of retainer earnings.
__________ increase equity (via net income) from sales of products and services to customers; examples are sales, of products, consulting services provided, facilities rented to others, and commissions from services. A part of retained earnings.
Decrease equity (via net income) from costs of providing products and services to customers; examples are costs of employee time, use of supplies, advertising, utilities, and insurance fees. A part of retained earnings.
More generally, __________ refers to the amount stockholders invest in the company.
__________ is the accumulated revenues less the accumulated expenses and dividends since the company began.
Expanded Account Equation
The breakdown of equity yields the following __________:
Assets = Liabilities + (Contributed Capital + Retained Earnings)
Assets = Liabilities + (Common Stock - Dividends + Revenues - Expenses)
__________ occurs when revenue exceeds expenses. It increases equity.
A __________ occurs when expense exceed revenues, which decreases equity.
Exchanges of value between two entities, which yield changes in the accounting equation. An example is the sale of a protection plan by an electronics company.
Exchanges within an entity, which may of may not affect the accounting equation. An example is a social media company's use of its supplies, which are reported as expenses when used.
Happenings that affect the accounting equation and are reliably measured. They include business changes such as in the market value of certain assets and liabilities and natural changes such as floods and fires that destroy assets and create losses.
There are three basic types of __________; services, merchandising, and manufacturing.
A basic company operation that refers to providing customer services for profit.
A basic company operation that refers to buying products and reselling them for profit.
A basic company operation that refers to creating products and selling them for profit.
There are four basic __________ prepared from business transactions; income statement, statement of retained earnings, balance sheet, and statement of cash flows.
An __________ describes a company's revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities.
Net Income = Revenues - Expenses
Statement of Retained Earnings
A __________ explains changes in equity from net income (or loss) and from any dividends over a period of time.
Retained Earnings (End) = Retained Earnings (Start) + Net Income - Dividends
A __________ describes a company's financial position (types and amounts of assets, liabilities, and equity) at a point in time.
Assets = Liabilities + Equity
Statement of Cash Flows
A __________ identifies cash inflows (receipts) and cash outflows (payments) over a period of time.
Cash Balance (End) = Cash Balance (Start) + Net Cash Flows (Operating) + Net Cash Flows (Investing) + Net Cash Flows (Financing)
A presentation of a balance sheet where assets are on the left and liabilities and equity are on the right.
A presentation of a balance sheet where assets are on top, followed by liabilities and then equity at the bottom.
Sustainable Accounting Standards Board (SASB)
The __________ is a nonprofit entity engaged in creating and disseminating sustainability accounting standards for use by companies.
Environmental, Social, and Governance (ESG)
Sustainability refers to __________ dimensions of a company.
Return On Assets (ROI)
__________ = Net Income/Average Total Assets
It is a profitability measure useful in evaluating management, analyzing and forecasting profits, and planning activities.
Dun & Bradstreet's and The Risk Management Association
Industry averages are available from services such as __________ Industry Norms and Key Ratios and __________ Annual Statement Studies.
If we invest money into an entity, __________ is expected. It is often linked to net imcome.
__________ is the uncertainty about the return we will earn.
The accounting equation is derived from three major __________; financing, investing, and operating.
A business activity that refers to providing the means organizations use to pay for resources such as land, buildings, and equipment to carry out plans.
A business activity that refers to the acquiring and disposing of resources (assets) that an organization uses to acquire and sell its products or services.
A business activity that refers to using resources to research, develop, purchase, produce, distribute, and market products and services.