Chapter 1 - Accounting in Business

Financial accounting is governed by the ____
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Financial accounting is governed by the ____
Generally Accepted Accounting Principles (GAAP)
GAAP wants information to have ____ and ___ ___
relevance and faithful representation
Relevant information affects the ___ of users
decisions
Faithful representation means
information accurately reflects the business results
The ____ is given the task of setting GAAP from the SEC
Financial Accounting Standards Board (FASB)
The International Accounting Standards Board (IASB) issues the _____ that identify preferred accounting practices
IFRS International Financial Reporting Standards
General Principles are the
assumptions concepts and guidelines for preparing financial statements
Specific principles are
detailed rules used in reporting business transactions and events - described as we encounter them
4 general accounting principles
Measurement (cost) principle

Revenue recognition principle

Expense recognition principle

Full disclosure principle
Measurement (cost) Principle
based on actual cost

ex: if cash is given for a service - cost is measured by cash paid

Something besides cash - measure the cash value (which is objective)
Revenue Recognition PrincipleRevenue is recognized when goods/services are provided to customers and at the amount expected to be received from the customer to recognize means to record itExpense Recognition PrincipleA company records the expenses it incurred to generate the revenue reported ex: rentFull Disclosure PrincipleA company reports details behind financial statements that would impact users' decisions. *often in footnoes4 accounting assumptionsGoing Concern Monetary Unit Time period Business entityGoing Concernpresumes business will continue operating instead of being closed or sold *reported at cost not liquidationMonetary Unitexpressed in monetary unit ex: dollarTime periodlife of company can be divided into time periods such as months/year, reports can be prepared for these periodsBusiness entity assumptionA business is accounted for separately from other business entities, including its owner.Sole Proprietorship *# of owners *Business Taxation *owner liability *legal entity *business life1 owner no additional business income tax unlimited liability - owner is personally liable for proprietorship debts NOT a separate legal entity Business ends with owner death or choicePartnership *# of owners *Business Taxation *owner liability *legal entity *business life2 or more (called partners) No additional business income tax Unlimited liability. Partners are jointly responsible for debt Not a separate legal entity Business ends with partner choice or deathCorporation *# of owners *Business Taxation *owner liability *legal entity *business life1 or more called shareholders can get many investors by selling stock or shares of corporate ownership Additional corporate income tax Limited liability. Owners called shareholders, not liable for corporate acts and debts A separate entity with same rights as person life is indefiniteLimited Liability Company (LLC) *# of owners *Business Taxation *owner liability *legal entity *business life1 or more called members No additional business income tax Limited liability, called members A separate entity with same rights and responsibilities life is indefiniteWhen a corporation issues only one class of stock is called ___ ___ (or __ __)Common stock or capital stockCost Benefit Constraintinformation disclosed by an entity must have benefits to the user that are greater than the costs of providing itMateriality is the ability of information toinfluence decisionsAAA Painting performs services for a customer. AAA records revenue this period even though the customer is not billed until next period. This reflects __ ___ principlerevenue recognitionMing Studios purchases camera equipment for $12,000 cash. The owner thinks the equipment is worth $18,000. The equipment is recorded at $12,000. This is the ___ ___measurement principleAlfonso owns Consulting LLC. Alfonso keeps personal expenses separate from LLC expenses This is the ___ ___ assumptionbusiness entityAn entrepreneur is deciding between a sole proprietorship and an LLC. Two goals are to pay no additional business income tax and to have limited liability. Recommend business entity typeLLCAn entrepreneur is deciding between a partnership and a corporation. Two goals are the ability to add many investors by selling shares of ownership and a business with an indefinite life. Recommend business entity typecorporationAssets = ___ + ___Liabilities + EquityAssets areresources owned by a businessThe claims on company assets - what it owes are separated intoowner (equity) and non-owner (liability) claimsAssets are expected to __ ___ __yield future benefitsA receivable is an asset thatpromises a future inflow of resourcesLiabilities arecreditors claim on assetsLiabilities are obligations to provideassets, products, or services to othersA payable is aliability that promises a future inflow of resourcesEquity isowners claim on assets equal to assets - liabilities4 parts of equityOwner Capital Owner Withdrawal Revenue ExpensesOwner investments (capital)inflows of cash and other net assets from owner contributions, INCREASES equityOwner Withdrawalsoutflow of cash and other assets to owners for personal uses, REDUCE equityRevenuesincrease equity (via net income) from sales of products and services to customersExpensesdecrease equity from costs of providing products and services to customersExternal Transactionsexchanges of value between two entities, which cause a change in the accounting equation ex: sale of Apple Protection Plan byInternal Transactionsexchanges within an entity, which may or may not affect the accounting equation ex: company use of supplies, expensed when usedEvents arehappenings that affect the accounting equationIncome Statementcompany revenue and expenses, computes net income or loss over a period of timeStatement of Owners EquityExplains changes in owner's equity from owner investments, net income (or loss), and any withdrawals over a period of timeBalance SheetA companys financial position at a POINT in timeStatement of cash flowsidentifies cash inflows (receipts) and cash outflows (payments) over a period of timeNet incomerevenue exceed expensesReturn on Assets Formulanet income/average total assetsThree factors that push person to commit fraudopportunity, pressure, rationalizationMC QUESTIONS PAGE27..