Accounting 200 Chapter One

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Accounting

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An information system that provides reports to stakeholders about the economic activities and condition of a business.

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Business Strategy

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An integrated set of plans and actions designed to enable the business to gain an advantage over its competitors, and in doing so, to maximize its profits. Three different strategies, 1.Differention 2.Low-Cost 3.Combination

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Business Stakeholder

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A person or entity that has an interest in the economic performance and well-being of a business. Four types: 1.Captial Market shareholders 2. Product or service market stakeholders 3.Government stakeholders 4.Internal stakeholders.

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Financing Activities

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Business activity which involves obtaining funds to begin and operate a business. Typically in the form of borrowing money,or issuing stock.

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Liability

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A legal obligation to repay the amount borrowed according to the terms of the borrowing agreement.

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Account Payable

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When a business borrows from a vendor or a supplier, this liability is created. The debt incurred is a financing activity.

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Commercial Paper

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Refers to any debt obligations that are sold to investors, such as banks and insurance companies, based on the general creditworthiness of the corporation. A financing activity.

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Note Payable

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When a corporation issues commercial paper or borrows on a line of credit, it incures this. It requires the payment of the amount borrowed plus interest. It is a financing activity.

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Dividends

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The distribution of payment of earnings to stockholders on a regular basis as long as the claims of creditors are being satisfied. These payments are a financing activity.

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Investing Activity

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Once financing is obtained, a business must do this to obtain the necessary resources to start and operate the business. Essentially, using the financing activities to purchase assets for the company to use.

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Assets

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The resources that a business owns. Acquired through financing activities when the busniness obtains cash through borrowing or issuing shares of stock. Includes accountes receivable and prepaid expenses. Part of investing activities.

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Account Receivable

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The right of a business to payment from a customer. An investing activity.

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Operativing Activities

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Once resources have been acquired, a business uses these to implement its business strategy. Includes expenses, revenue, net income, and net loss.

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Revenue

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The increase in assets from selling products or services. Often identified according to their source, such as sales.

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Expenses

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To earn revenue, a business must incurs cost, such as wages of employees, salaries of managers, rent, etc. This is the cost used to earn revenue.

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Income Statement

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A summary of the revenue and the expenses for a specific period of time, such as a month or a year. Essentially, reports the financial condition resulting from the operations of a business. Revenues minus expenses equals either net income or net loss.

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Retained Earnings Statement

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Reports financial condition due to changes in the portion of a corporations net income that is retained in the business. A corporation may retain all of its net income for use in expanding operations, or it may pay a portion or all of its net income to stockholders as dividends.

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Retained Earnings

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Net income retained within a corporation, (dividends not paid).

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Accounting Equation

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Assets = Liabilities + Owner's Stockholders' Equity

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Balance Sheet

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A list of assests, liabilities, and owners' quity as of a specific date, usually at the close of the last day of a month or a year.

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Statement of Cash Flows

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A summary of the cash receipts and cash payments for a specific period of time.

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GAAP (Generally Accepted Accounting Principles)

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Rules for the way financial statements should be prepared.

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Business Entity Concept

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An accounting concept that limits the economic data in the accounting system of a specific business or entity to data related directly to the activities of that business or entity.

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Cost Concept

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An accounting concept that determines the amount initially entered into the accounting records for purchases.

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Going Concern Concept

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An accounting concept that assumes a business will continue operationg for an indefinite period of time.

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Matching Concept

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An accounting concept that requires expenses of a period to be matched with the revenue generated during that period.

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Objectivity Concept

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An accounting concept that requires accounting records and data reported in financial statements be based on objective evidence.

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Unit of Measure Concept

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An accounting concept requiring that economic data be recorded in dollars.

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Adequate Disclosure Concept

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An accounting concept that requires financial statements to include all relevant data a reader needs to understant the financial condition and performance of a business.

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Accounting Period

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An accounting concept in which accounting data are recorded and summarized in a period process.

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Horizontal Financial Statement

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A method of analyzing financial performance that computes the percentage of increases and decreases in related items in comparative financial statements.