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Financial Accounting

Chapter 1: The Financial Statements

TermDefinition
Accounting an information system that measures business activities, processes data into financial statements and reports, and communicates results to decision makers
Decision Makers Who Use Accounting *individuals *Investors and creditors *Regulatory bodies *Nonprofit organizations
Two Types of Accounting *financial accounting *managerial accounting
Financial accounting provides relevant and accurate financial information to decision makers outside of an organization, such as investors, creditors, government agencies, and the public
Managerial accounting provides accurate and relevant information to people inside the organization, such as managers. Includes budgets, forecasts and projections used to make strategic decisions.
How are Businesses Organized *Proprietorship *Partnership *Limited-liability company (LLC) *Corporation
Proprietorship *single owner *proprietor is personally liable
Partnership *Two or more partners *Partnership doesn't pay taxes, rather the individuals *General partners are personally liable; limited partners are not *Governed by an agreement
Limited-Liability Company (LLC) *One or many owners called members *Members are not personally liable *Income flows through to members and they pay at their own tax rate
Corporation *Stockholders--generally many owners *Stockholders are not personally liable *Must be performed under state law *Legally distinct from its owners *Major disadvantage with double taxation
General Partnership each partner can conduct business on behalf of the organization and can make agreements that legally bind all partners
Limited-liability partnership *one in which a single partner cannot create a large liability for the other partners *each partner is liable for the partnership's debts only up to the extent of their investment in the partnership *must have one general partner that has unlimited liability
Stockholders, or shareholders own stock representing shares of ownership in the corporation.
Generally Accepted Accounting Principels (GAAP) standards are formulated by the Financial Accounting Standards Board (FASB)
International Financial Reporting Standards (IFRS) standards are set by the International Accounting Standards Board (FASB)
material *means it must be important enough that, if it were omitted or incorrect, it would affect a user's decision *only information that must be separately disclosed in financial statements
enhancing qualitative characteristics accounting information must have this which includes: comparability, verifiability, timeliness, and understandability
Comparability means that accounting information must be prepared in a way that allows it to be compared with information from other companies in the same period and it should be consistent with similar information for that company in previous periods
Verifiability means that it must be possible to check the information for accuracy, completeness, and reliability.
Timeliness means that the information must be made available to users early enough to help them make decisions
Understandability means the information must be transparent, or clear, enough so that it makes sense to reasonably informed users of the information (investors, creditors, regulatory agencies, and managers)
Cost the cost of disclosing accounting information should not exceed its expected benefits to the user
Entity Assumption entity, which is an organization (or person) that stands apart as a separate economic unit so as not to confuse its affairs with others
Continuity (Going-Concern) Assumption When measuring and reporting accounting information, we assume that the entity will continue to operate long enough to sell its inventories, convert any receivables to cash, use other existing assets (such as land, buildings, equipment, and supplies) for their intended purposes, and settle its obligations in the normal course of business
Quitting concern going out of business assumption; therefore, assets are measured at their liquidity value
Historical cost principle states that assets should be record at their actual cost, measured on the date of purchase as the amount of cash paid plus noncash types of compensation given in exchange
Fair value the amount that the business could sell the asset for, or the amount that the business could sell the asset for, or the amount that the business could pay to settle the liability
Stable-monetary-unit assumption assuming the dollar's purchasing power is stable over time
Assets economic resources that are expected to produce a benefit in the future.
Liabilities debts owed to people and organizations outside the business (creditors); "outsider claims"
Equity *(also called capital, owners' equity, or stockholders' equity); "insider claims" *assets minus liabilities
Accounting equation shows the relationship among a company's assets, liabilities, and equity where assets must equal the total of liabilities and equity
Cash or cash equivalents liquid assets that can be readily converted to cash
Fixed assets long-lived assets the company uses to do business
Account payable a liability for goods or services purchased on credit
Long-term debt liability that's payable beyond one year from the date of the financial statements
Current portion of long-term debt (borrowings) the amount due within the next year, and it has to be disclosed separately in the current liabilities section
Stockholders' equity subparts *Paid-in capital *Retained earnings
Corporation accounting equation *Assets=liabilities+Stockholders' equity *Assets=liabilities+Paid-in capital+retained earnings
Paid-in capital *the amount the stockholders have invested in the corporation *basic component is common stock
Retained earnings *the amount earned by income-producing activities and kept for use by the business *affected by revenues, expenses, and dividends
Revenues inflows of resources that increase retained earnings as a result of the company delivering goods or services to customers
Expenses resource outflows that decrease a company's retained earnings due to operations representing the cost of doing business
Dividends *decrease retained earnings, because they are distributed to stockholders of assets generated by company's activities *dividends are not expenses, never affect a company's net income *recorded as direct reductions of retained earnings
Profits the excess of revenues over expenses
Net income, net earnings or net profit when a company's total revenue exceed total expenses
Net loss a company's expenses exceed total revenues
Bottom line net income or net loss
Created by: superfli72