Chapter #1 - The Link Between Business And Accounting

Front 1

What is a Transaction?

Back 1

A transaction is a business activity that results in an economic exchange between a business entity and a person or form outside the entity.

Front 2

What is Accounting?

Back 2

Accounting – The process of identifying, measuring, and communicating financial business information to various users.

Front 3

What are the two types of firms?

Back 3

The two types of firms are -
For-profit – a firm that creates or adds value to earn money for its owners.
Not-for-profit – a firm that provides goods or services for the sole purpose of helping people instead of making a profit.

Front 4

What Accounting Information is needed to operate a firm?

Back 4

The accounting information needed to operate a firm is
Revenues – the amount a business earns for the goods its sells or the services it provides.
Expenses – cost of selling goods or providing services to earn revenues.
Profit – the difference between revenues and expenses.

Front 5

What are the three main types of businesses?

Back 5

Three main types of businesses are -
Service Firms – which provide services to their customers.
Merchandising firms – which provide products to their customers.
Manufacturing firms – which make the products they provide to their customers.

Front 6

What are the three forms of business ownership?

Back 6

The three forms of business ownerships are -
Sole Proprietorship – firm owned by an individual.
Partnership – a firm owned by two or more individuals.
Corporation – a legal entity that may have any number of owners.

Front 7

What is the Operating cycle

Back 7

The Operating cycle is the sequence of business activities starting with cash, using cash to purchase inputs, changing those inputs into products and services, and providing product to customers, eventually getting cash back.

Front 8

What are the two basic types of accounting?

Back 8

The two basic types of accounting are -
Management accounting – the area of accounting that is specifically concerned with internal information and is not governed by any general rules or regulations.
Financial accounting – the area of accounting that is specifically concerned with communicating accounting information in the form of financial statements.

Front 9

Who are the users of accounting information?

Back 9

The users of accounting information are -
External users – government, creditors, potential investors, and vendors, customers, and employees.
Internal users – management.

Front 10

Who sets the rules for financial reporting?

Back 10

GAAP – Generally Accepted Accounting Principles – a broad set of accounting rules that a company must follow when preparing its financial statements.
SEC – Securities and Exchange Commission – has the authority to monitor activities and financial reporting of corporations that sells shares of ownership on the stock exchanges.
FASB – Financial Accounting Standards Board – group of professional business people, accountants, and accounting scholars in the private sector who have the responsibility of setting current accounting standards.
PCAOB – Public Companies Accounting Oversight Board – a private sector, nonprofit corporation created to oversee the auditors of public companies

Front 11

What are the four basic financial statements?

Back 11

The Balance Sheet
The Income Statement
The Statement of Stockholder's Equity
The Statement of Cash Flows

Front 12

What is ratio analysis?

Back 12

A ratio is an expression of a mathematical relationship between one quantity and another.

Front 13

What are the major risks associated with being in business?

Back 13

The major risks associated with being in business are -
Lack of management systems.
Lack of vision and purpose by the principals.
Lack of financial planning and review.

Front 14

What federal law sets the guidelines for ethics in financial reporting?

Back 14

Sarbanes-Oxley Act of 2002 – is the law passed by Congress that sets new rules for the ways corporations govern themselves, including rules to make a corporation’s internal controls more effective and procedures for increasing the understandability of financial reporting.

Front 15

What is an audit, and why do firms need one?

Back 15

Audit – an examination of a company’s financial statement by certified public accountants to provide evidence that the financial position of the company is fairly stated.