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accounting ch 1


What is accounting? information system which includes: definitions, measurement rukes and internal error checking. It also reflects finical events in accordance with consistent rules as well as keeps track of the financial performance of a firm or not-for-profit.
Who are the producers and users of accounting information? Accounting reports are produced by firms and audited by accountants (CPAs). External users: (financial accounting) are regulators, investors, lenders, consumers, etc
Generally Accepted Accounting Principles (GAAP) concepts and rules to be followed in recording financial activities. They provide a common reference so that users can interpret results according to an agreed upon "yardstick"
Financial Accounting Standards Board (FASB) *source of the GAAP in USA, it determines acceptable accounting principles
International Accounting Standards Board (IASB) *source of the GAAP internationally, its the authority
Securities Exchange Commission (SEC) *source of the GAAP government has a role- in the USA, it has legal authority that is delegated to FASB
Matching Principle (expense recognition)prescribes that a company must record its expenses incurred to generate the revenue
Full disclosure principle requires a company to report the details behind financial statements that would impact user's decisions
Measurement Principle (aka the cost principle) means that accounting information is based on actual cost
Revenue Recognition Principle provides guidance on when a company must recognize revenue
Going-concern assumption accounting information reflects a presumption that the business will continue operating
Time period assumption the life of a company can be divided into time periods, such as months and years
monetary unit assumptions we can express transactions in money
business entity assumption a business is accounted for separately from its owner or other business entities
financing acquiring resources to begin or operate firm (debt and equity)
Investing acquiring productive capacity to produce goods and services (long lived investments)
Operations creation of goods and services to be sold to customers of firm (current costs and revenues)
Accounting Model a system to reflect firm activities. Disciplined measurement system focusing on: owner equity as a measure of accumulated value and net income as a measure of change in value.
Accounting Model Equation Assets = Liabilities + Equity (A=L+E)
Assets things the firm owns/controls that have future economic benefit. Examples: cash, supplies,equipment,land, accounts receivable
Liabilities future obligations the firm owns. Examples: accounts payable, note payable, wages payable..anything with payable
Equity the owners' share of the assets defined as: equity = assets-liabilities. Examples:common stock,retained earnings, revenues, dividends, expenses, captail equity=inested equity+earned&reinvested equity equity=invested equity(common stock)+retained earning
Retained Earnings (RE) earnings reinvested in firm: earnings= revenues- expenses retained earnings at any time are equal to the beginning balance plue revenue, minues expenses and minues dividends (payments from firm to owners): RE(end)=RE(beg)+revenue-expense-dividends
Materiality Constraint prescribes that only information that would influence the decisions of a reasonable person need to be disclosed. It looks at both the importance and relative size of an amount.
The cost-benefit constraint prescribes that only information with benefits of disclosure greater than the costs of providing it need be disclosed
Sarbanes-Oxley Act aka 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.more truth in reporting transactions
dividends the distribution of assets to stockholders
retained earnings refers to income (revenue-expenses) that is not distributed to its stockholders
common stock contributed capital refers to the amount that stockholders invest in the company- under the title of common stock
Income Statement reports revenues and costs of activities for a period of time (flows)
Balance Sheet reports firm's resources and obligations and a point in time (snapshot)
Statement of Retained Earnings explains changes in retained earnings from net income (or loss) and from any dividends over a period of time
Statement of Cash Flows identifies cash inflows (receipts) and cash outflows (payments) over a period of time
Net Income the difference between revenues and expenses. If expenses exceed revenues then we have NET LOSS.
Return on Assets (ROA) measure of firm performance. ROA=Net Income/ Average Total Assets
Created by: asitov
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