Accounting Fundamentals Chapter 1

Involves only recording economic events.

Encompasses identification, recording, and communication of events, along with analysis and interpretation.

The practice of using ratios, percentages, and visualizations like graphs and charts to identify trends within financial data.

The process of explaining the meaning and implications of the analyzed financial data, including its limitations.

A skill that is valuable for everyone, regardless of career path, as it provides insights into how businesses and finances operate.

Identifying, recording, and summarizing economic events to create financial statements used by both internal and external stakeholders.

Individuals within a company, such as managers and employees, who use accounting information for internal decision-making.

Individuals or groups outside the company, such as investors, creditors, and government agencies, who use accounting information to make decisions about the company.

Individuals or organizations outside the company, like investors, creditors, and customers, who use accounting information to make decisions about the company.

The process of using statistical and software tools to analyze vast amounts of company data to gain insights and make better decisions.

Investors who use accounting information to decide whether to buy, hold, or sell ownership interest in a company, based on the company's profitability.

Creditors who use accounting information to assess the risks of lending money or granting credit to a company, evaluating its ability to repay debts.

The primary purpose of financial reporting is to provide useful information to existing and potential investors and creditors for decision-making about allocating resources to a business.

Internal users have direct access to customized, real-time accounting information to support operational and strategic planning within the company.

Limited to publicly available data or information provided by the company, external users rely on standardized and regulated financial reports to make their decisions.

The core of financial accounting is determining what information external users need and how to provide it effectively.

Financial statements are prepared and presented differently depending on the type of business structure.

A business owned and controlled by one person. The owner is personally liable for all debts and obligations.

A business owned by two or more individuals. Partners share profits, losses, and liabilities.

A legal entity separate from its owners. Shareholders have limited liability and enjoy the advantages of limited liability.

Users of financial statements are interested in the company's financial performance, such as profitability and cash flow generation.

Users of financial statements want to know how efficiently and effectively the company's resources are being managed.

A financial statement that provides a snapshot of a company's financial position at a specific point in time.

A financial statement that reports a company's profitability over a specific period, typically a month, quarter, or year.

A financial statement that tracks the cash inflows and outflows of a business, categorized into operating, investing, and financing activities.

Economic resources that are expected to provide future benefits to a business, like cash, receivables, and inventory.

Obligations that a business has to pay to others, such as accounts payable, loans, and salaries.

The residual claim that owners have on the assets of a business after all liabilities are paid.

The fundamental accounting equation that states that the total assets of a business must equal the sum of its liabilities and owner's equity.

An expanded version of the accounting equation that includes specific components of owner's equity, such as owner's capital, drawings, revenues, and expenses.

Financial reporting is focused on providing useful information about a company's financial performance and position. This involves providing data on key elements like assets, liabilities, equity, revenue, and expenses.

These characteristics ensure accounting information is reliable and relevant. Fundamental characteristics are relevance to the user and faithfulness to the facts. Enhancing characteristics make the information more useful, including: comparability, verifiability, timeliness, and understandability.

This principle outlines the rules for recording and reporting financial transactions. It covers key concepts like revenue recognition (when to record income), matching principle (matching expenses with revenue), historical cost (recording assets at their original cost), and fair value (recording assets at their current market value).

This assumption states that a company will continue to operate in the foreseeable future and is not going to liquidate or close down soon.

This principle assumes that a company's financial performance can be divided into specific periods, like months, quarters, or years, to enable investors to track how the business performs in each time period.

This concept emphasizes that financial information should be presented in a way that is easy to understand and interpret for various users of financial statements.

This concept suggests that financial statements should be prepared for a specific entity or company. They should focus on the company's operations, assets, and liabilities, not on those of its owners or other related entities.

The process of analyzing how a business transaction affects the accounting equation, identifying which accounts are impacted and whether they increase or decrease.

An event that has a direct impact on the financial position of a company, such as a sale, purchase, or payment.

An investment made by the owner into the business, increasing both the business's assets (usually cash) and the owner's equity.

The purchase of equipment using cash, which involves decreasing one asset (cash) and increasing another asset (equipment), maintaining total assets unchanged.

Acquiring supplies on credit, meaning the company receives the supplies but owes payment later. This increases both assets (supplies) and liabilities (accounts payable).

Earning revenue in cash for services rendered, increasing both assets (cash) and equity (service revenue) due to the company's performance.

Advertising on credit, which increases liabilities (accounts payable) because the company owes payment for the advertisement and decreases equity (advertising expense) because it reflects the cost of the advertisement.