Fundamental Accounting Principles (Chapter One)

Front 1

What is Accounting and its purpose?

Back 1

Accounting is an information and measurement system that identifies, records, and communicates relevant, reliable and comparable information about an organizations business activities.

Front 2

What is recordkeeping or bookkeeping?

Back 2

recording of transactions and events, either manually or electronically.

Front 3

What is the difference between Accounting and bookkeeping?

Back 3

Bookkeeping covers a part of accounting, which is recording.
Accounting covers the Identification, RECORDING, and communication of information.

Front 4

Who are the general users of accounting information?

Back 4

External Users and Internal Users

Front 5

What is the difference between External and Internal users?

Give examples of each.

Back 5

External Users of accounting information are not directly involved in running the organization.

Internal Users of accounting are those directly involved in the running of the organization.

Hint 5

External- Lenders, shareholders, governments, consumer groups, external auditors, customers.

Internal- Officers, managers, internal auditors, sales staff, budget officers, controllers.

Front 6

Financial Accounting

What is the imporatance.

Back 6

Area of accounting aimed at serving external users by providing then general purpose financial statements.

Hint 6

Depending on what types of information is needed, it will serve as the informant (Via financial statements) to help users make a decision that best suits the business.

Front 7

Managerial Accounting.

What is the importance?

Back 7

Area accounting of accounting that serves the decision making needs of internal users.

Hint 7

Accounting reports are used bby the people involved on the business itself creating actions based on accounting statements.

Front 8

What does managerial and financial accounting have in common?

Back 8

They both rely on internal controls to monitor and control company activities.

What are internal Controls?

Hint 8

Internal Controls are procedures set up to protect company property and equiptment, ensure reliable accounting reports, promote efficiency and encourage adherence to company policies.

Front 9

Ethics

What is the key concept to remember about Ethics.

Back 9

Ethics are beliefs that distinguish right from wrong and they are accepted standards of good and bad behavior.

Hint 9

That just because it is legal doesnt make it ethical.

Front 10

What three step guidelines can help people make ethical decisions?

Back 10

Identify ethical concerns: use personal ethics to recognize ethical concern.

Analyze options: consider all good and bad consequences.

Make ethical decisions: Choose best option after weighing all consequences.

Front 11

What is GAAP and why is it important.

Back 11

Generally Accepted Accounting Principles

Set of principles that allows to use and interpret financial statements effectively.

Front 12

What is SEC?

What does it do?

Back 12

Securities and Exchange Commission.

A government agency that has legal authority to set GAAP.

Hint 12

-oversees proper use of GAAP by companies that raises money from public through issue of stock and debt.

Front 13

What is FASB?

Back 13

Financial Accounting Standards Board

Private sector group that sets both broad and specific principles.

Front 14

IASB

Back 14

International Accounting Standards board.

Issues IFRS

Hint 14

International Financial Reporting Standards.

Identifies preffered accounting practices.

Front 15

What type of framework is the FASB and IASB trying to establish to set standards?

Back 15

Objectives- provide info useful to investors

Qualitative characteristics- to require info that is relevant, reliable and comparable

elements- to define items that financial statements may contain.

Recognition and measurement- to set criteria that an item must meet for it to be recognized as an element; and how to measure that element

Front 16

What are the two types of Accounting principles/assumptions?

Back 16

General Principles

Specific principles

Hint 16

General- basic assumptions, concepts and guidelines for preparing financial statements.

Specfic Principles are detailed rules used in reporting business transactions and events.

Front 17

What are the building blocks of GAAP?

Name it.

Back 17

The accounting principles; which consists of 4 principles, 4 assumptions, and 2 constraints.

Hint 17

Principles- measurement, full disclosure, revenue recognition, and expense recognition

assumptions- going concern, monetary unit, time period, business entity

Constraints- materiality and benefits>cost

Front 18

Measurement Principle (Cost Principle)

Back 18

means that accounting information is based on actual cost (with a potential of subsequent market).

measured on a cash or equal to cash basis.

Hint 18

If cash is given for a service-cost is measured the amount of cash paid.

emphasizes reliability and verifiability and info based on cost is objective.

Front 19

What does objectivity mean?

Back 19

information is supported by independent unbiased evidence; it demands more than a persons opinion.

Front 20

Revenue

Back 20

Amount received from selling products or services.

Front 21

Revenue Recognition Principle

Why is it important?

Back 21

provides guidance on when a company must recognize (to record) revenue.

Hint 21

If recognized too early, a company would look too profitable than it really us.

If too late, it loses profit.

Front 22

Three important Concepts of Revenue Recognition

Back 22

1. Revenue is recognized when earned.

2. proceeds from selling products and services need not be in cash.

3. revenue is measured by the cash received plus the cash value of any other items received.

Front 23

Expense recognition principle (matching principle)

Back 23

prescribes that a company record the expenses it incurred to fenerate the revenue reported.

Front 24

Full disclosure principle

Back 24

prescribes that a company to report the details behind financial statements that would impact user's decisions.

Front 25

Going Concern Assumption

Back 25

accounting information reflects a presumption that the business will continue operating instead of being closed or sold.

Examples?

Hint 25

Property reported at cost instead of liquidation values that assume closure.

Front 26

Sarbanes Oxley Act.

Back 26

Also known as SOX

Passed by Congress to help curb financial abuses at companies that sell stock to the public

Management must issue a report stating that its internal controls are effective.

Auditors must verify the effectiveness of internal controls.

Front 27

monetary unit assumption

Back 27

Express transactions and events in monetary, or money, units.

Front 28

Time period assumption

Back 28

Presumes that the life of a company can be divided into periods.

Importance?

Hint 28

useful reports can be made when divided for better decisions.

Front 29

Business entity assumption

Back 29

A business is accounted for separately from other business entities, including its owner.

Why?

Hint 29

Because seperate information about each business is necessary for good decisions.

Front 30

Three Forms of business entitiy:

Back 30

Proprietorship, Partnership and Corporation.

Front 31

Sole Proprietorship

Back 31

A sole proprietorship is a business owned by just one individual.

Seperate Entity for accounting purposes but not a separate entity legally.

Pros and Cons?

Hint 31

Pro-income not subject to a business income tax; reported and taxed on owners own tax returns

Con-unlimited liability.

Front 32

Partnership

Back 32

Business owned by two or more people.

Just like Proprietorship where it is not legally a separate entity, taxed the same way and unlimited liability.

When does a partnerships have limited liability?

Hint 32

Limited Partnership (LC)- includes a general partner with unlimited liability and a limited partner with liability limited to amount invested.

Limited Liability Partnership (LLP)- restricts partners liabilities to their own acts and the acts of individuals under their control; protecting innocent partners from being sued.

Limited Liability Company (LLC)- offers the limited liability of a corporation and the tax treatment of a partnership/proprietorship.

Front 33

Corporation

Back 33

a business legally seperated from its owners, meaning it is responsible for its own acts or debts.

Pros and Cons?

Hint 33

Pros- Limited Liability.

Con- Double taxation

Front 34

What is common stock?

Back 34

Main share or stock that a corporation issues.

Front 35

Materiality Constraint

Back 35

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 of an amount

Front 36

Cost Benefit Constraint

Back 36

Prescribes that only information with benefits of disclosure greater than the costs of providing it need be disclosed.

Front 37

Identify some advantages of technology for accounting.

Back 37

accuracy, speed and convenience.

Front 38

How are US companies affected by international accounting standards?

Back 38

Most US companies are not directly affected by international accounting standards. International standards are put forth as preferred accounting practices. However, stock exchanges and other parties are increasing the pressure to narrow differences in worldwide accounting practices. International accounting standards are playing a an important role in that process.

Front 39

How are the objectivity concept and cost principle related?

Back 39

Most users consider information based on cast as objective. Information prepared using both is considered highly reliable and often relevant.

Front 40

What are the four basic principles of accounting?

Back 40

Measurement Principle (Cost Principle), Revenue Recognition Principle, Expense Recognition Principle (Matching Principle), Full Disclosure Principle.

Front 41

What are the four accounting assumptions?

Back 41

The going concern assumption, the monetary unit assumption, the time period assumption, the business entity assumption.

Front 42

What are the two basic accounting restraints?

Back 42

The materiality constraint and cost benefit constraint.

Front 43

What are income statements?

Back 43

Describe a company's revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities.

Front 44

What are statement of owner's equity?

Back 44

Explains changes in equity from net income (or loss) and from any owner investments and withdrawals over a period of time.

Front 45

what is a balance sheet?

Back 45

describe a company's financial position (types and amounts, liabilities, and equity.) at a point in time.

Front 46

what are Statement of cash flows?

Back 46

identifies cash inflows (receipts) and cash outflows (payments) over a period of time.

Front 47

What are the four main financial statements?

Back 47

Income statement, statement of owners equity, balance sheet, statement of cash flows.

Front 48

What are Return on Assets?

Back 48

Return on assets = Net income/Average total assets.

Also known as Return on Investments.

Useful in evaluating management, analyzing and forecasting profits, and planning activities.

The higher the percentage, the more productive the business uses its assets in its operation.

Front 49

What are the three major types of business activities?

Back 49

Financing, Investing, and Operating.

Front 50

What is return? What is risk? What are the relationships between the two?

Back 50

Return is ROA

Risk is the uncertainty about the return we will earn.

The higher the risk the higher the return.