Accounting Fundamentals > Chapter 1 > Flashcards

Chapter 1 Flashcards

Accounting: The Language of Business (62 cards)

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1
Q

What is Accounting?

A

Provides financial information about a business or a nonprofiit organization

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2
Q

What is the need for financial information?

A

To evaluate the firm’s performance and make decisions about the future

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3
Q

Accounting in Everyday Life

A
  1. Personal Budget for expanding earned income
  2. Tracking inflows/outflows of funds that we deposit in an account
  3. Saving for the future
  4. Investing funds to earn additional income
  5. Keeping track of investments
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4
Q

Accounting

A

The process by which financial information about a business is recorded, classified, summarized, interpreted, and communicated to ownders, managers, and other interested parties

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5
Q

Accounting System

A

A process designed to accumulate, classify, and summarize financial data

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6
Q

Financial Statements

A

Periodic reports of a firm’s financial position or operating results

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7
Q

Duties of the Accountant

A
  1. Establishes the records and procedures that make up the accounting system
  2. Supervises the operations of the system
  3. Interprets the resulting financial information
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8
Q

What are bookkeepers and accountants both responsible for?

A

Keeping records and providing financial information about the business

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9
Q

To become a CB (Certified Bookkeeper)

A
  1. Pass the national certified bookkeepers exam
  2. Sign the code of ethics
  3. Submit evidence of 2 years full time bookkeeping, or 3,000 part time hours
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10
Q

Responsibility of Accounting Clerks

A

recordkeeping part of the accounting system such as payroll, A/R, A/P

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11
Q

Three areas of Accountants

A

Public
Managerial
Governmental

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12
Q

Job Duty of Bookeeping, Accounting, and Auditing Clerks

A

Bookkeeping, accounting, and auditing clerks produce financial records for organizations. They record financial transactions, update statements, and check financial records for accuracy

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13
Q

Parts of Certified Bookkeeper Exam

A
  1. Adjustments and Error Corrections
  2. Payroll and Depreciation
  3. Inventory
  4. Internal Control and Fraud Prevention
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14
Q

Public Accountants

A

Members of firms that perform accounting services for other companies. Provide:
Auditing
Tax Accounting
Management Advisory Services

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15
Q

Largest public accounting firms, the “Big Four”

A

Deloitte and Touche
Ernst & Young
KPMG
PricewaterhouseCoopers

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16
Q

CPA

A

An independent accountant who provides accounting services to the public for a fee

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17
Q

Auditing

A

The review of financial statements to assess their fairness and adherence to generally accepted accounting principles

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18
Q

Tax Accounting

A

A service that involves tax compliance and tax planning

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19
Q

Tax Compliance

A

The preparation of tax returns and the audit of those returns

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20
Q

Tax Planning

A

Giving advice to clients on how to structure their financial affairs in order to reduce their tax liability

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21
Q

Management Advisory Services

A

Helping clients improve their information systems or their business performance

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22
Q

Managerial Accounting

A

Accounting work carried on by an accountant employed by a single business in the industry; the branch of accounting that provides financial information about business segments, activities, or products

AKA Private Accounting

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23
Q

Activities of Managerial Accounting

A
  • Establishing accounting policies
  • Managing the accounting system
  • Preparing financial statements
  • Interpreting financial information
  • Providing financial advice to management
  • Preparing tax forms
  • Performing tax planning services
  • Preparing internal reports for management
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24
Q

Governmental Accounting

A

Accounting work performed for a federal, state, or local governmental unit.

Hire to audit financial statements and uncover possible violations of the law

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25
Accounting Services
- Financial Planning - Investment Advice - Accounting and Tax Software Advice - Profitability Consulting - Information of electronic business, health care performance measurement, risk assessment, business performance measurement, and information system reliability
26
Users of Financial Information
- Owners and Managers - Suppliers - Banks - Tax Authorities - Regulatory Agencies and Investors - Customers - Employees and Unions
27
Responsibility of Owners/Managers
Internal Control and prevention of fraud
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Internal Control
A company's policies and procedures to safeguard assets, ensure reliability of accounting data, and promote compliance with management policies and applicable laws
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Fraud
Intentional or reckless acts that result in the confiscation of a firm's assets or the misrepresentation of the firm's accounting data
30
Common Internal control and fraud prevention policies
Written proof that transactions and payments are authorized and separating duties among employees
31
The Sarbanes-Oxley Act
- Passed in response to the wave of corporate accounting scandals - Tightens regulation of financial reporting by publicly held companies and their accountants and auditors - Created a five-member Public Company Accounting Oversight Board, which has investigative and enforcement powers to oversee the accounting profession and to discipline corrupt accountants - The board is overseen by The Securities and Exchange Commission - Two out of 5 board members must be CPAs
32
The Accounting Process
Involves recording, classifying, summarizing, interpreting, and communicating financial information about an economic or social entity
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Entity
Anything having its own separate identity, such as an individual, town, university, or business
34
Economic Entity
A business or organization whose major purpose is to produce a profit for its owners
35
Social Entity
Nonprofit organization such as a city, public school, or public hospital
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Types of Business Entities
1. Sole Proprietorships 2. Partnerships 3. Corporations
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Sole Proprietorship
- A Business entity owned by one person - The life of a business ends when the owner is no longer willing or able to keep the business going/ dies - Common in small businesses - Owner is legally responsible for the debts and taxes of the business - Can turn to owner for payment of business debts - Income taxes: the owners income and the income of the business are combined to compute total tax responsibility of the owner
38
Creditor
One to whom money is owed which can be people, companies, or government agencies
39
Separate Entity Assumption
The concept that a business is separate from its owners; the concept of keeping a firm's financial records separate from the owner's personal financial records
40
Partnership
- A business entity owned by two or more people - Common in businesses that offer professional services such as law firms, accounting firms, medical/dental practices. - 2 or more individuals enter into a contract that details the rights, obligations, and limitations of each partner - Ends on the death or withdrawl of a partner
41
Partnership Contract
- The amount each partner will contribute to the business - each partner's percentage of ownership - each partner's share of the profits - the duties each partner will perform - the responsibility each partnet has for the amounts owed by the business to creditors and tax authorities
42
Limited Liability Partnership
- A general partnership that provides some limited liability for all partners - LLP Partners are responsible and have liability for their own actions and the actions of thsoe under their control or supervision - Not liable for the actions of another partner
43
Corporations
- a business entity that is separate from its owners, the only form of business that is a separate legal entity - has a legal right to own property and do business in its own name - may be public or privately owned - Indefinite Life of business
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Stock
Certificates that represent ownership of a corporation
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Private Owned Corporations
- Also known as Closely Held Corporations - Ownership is limited to specific individuals, usually family members. - Stock is not traded on an exchange
46
Subchapter S Corporations
AKA S Corporations - Pays no income tax - Shareholders include their share of corporate profits on their individual tax returns - Advantage: Limited Liability and avoid double taxation
47
Stockholders
- Corporate Owners - Shareholders - Not personally responsible for the debts of taxes of the corporation
48
Limited Liability Company (LLC)
- Combines best feature of a partnership with those of a corporation - Limited Liability of a corporation - More than one owner, you are treated as a partnership on taxes - May have unlimited number of owners who can be almost any type of entity - May elect to be taxed as a corporation or a partnership
49
Generally Accepted Accounting Principles
Accounting standards developed and applied by professional accountants - developed by Financial Accounting Standard Board (FASB) (composed of 5 members)
50
International Accounting
the study of the accounting principles used by different countries - now regulated by the International Accounting Standards Board (IASB)
51
Auditor's Report
an independent accountant's review of a firm's financial statements - contains opinion about the fair presentation of the operating results
52
Managerial Implications
- Managers make sure the firms accounting system produces accurate financial information - Each year, must submit financial statements to the SEC
53
The 4 Assumptions of GAAP
- Separate Entity - Going Concern - Monetary Unit - Periodicity of Income
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The 4 Principles of GAAP
- Historical Cost Basis - Revenue Recognition - Matching - Full Disclosure
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Separate Entity
- Assumes business is a separate entity from owners - Transactions resulting from financial statements reflect the affairs of the business, not the owners
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Going Concern
- Assumes business will operate indefinitely - Permits business to record property and equipment as assets at their cost without having to concern the worth in case of liquidation
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Monetary Unit
- Assumes financial facts are meaningful only when expressed in monetary terms - Assumes value of monetary unit is stable
58
Periodicity of Income
- Assumes activities of business can be separated into time periods with revenues and expenses being assigned on a logical basis
59
Historical Cost Basis
- Business transactions are recorded on a historical cost basis and involved in transaction dealings in the market between the business and outisders
60
Revenue Recognition
- Revenue is recognized when it is both earned and realized. - Earning process is completed when the product or service has been delivered and the related cost has been incurred
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Matching
To properly measure income, expired cost incurred in earning the revenue must be reported in the same period that the earned revenue is reported
62
Full Disclosure
- The principle requires that all information that could affect the interpretation of the profitability and financial position must be disclosed in the financial statements
Accounting Fundamentals
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