Financial Accounting Chapter 1 Flashcards

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Questions and Answers

What is accounting?

The process of identifying, measuring, and communicating economic information to permit informed judgements and decisions (correct)

The management of personal finances

The process of identifying financial fraud

The study of economic theories

What does the economic entity assumption state?

Entity's financial activities are separate from the owners.

The time period assumption allows accountants to capture and communicate economic information over short periods of time.

True

What is the monetary unit assumption?

Records only items that can be expressed in terms of money. Signup and view all the answers

What does the going concern assumption imply?

It is reasonable to assume the business will continue operating in the near term. Signup and view all the answers

What is the Historical Cost Principle?

Assets should be recorded at the original verifiable cost. Signup and view all the answers

When should revenue be recognized according to the revenue recognition principle?

In the period that it is earned and collection of cash is reasonably assured. Signup and view all the answers

What is the expense recognition principle (matching principle)?

Expenses should be matched in the period that helped produce the revenues. Signup and view all the answers

What does conservatism represent in financial reporting?

A prudent reaction to uncertainty; offsets management's optimism. Signup and view all the answers

What does relevance in accounting refer to?

Makes a difference in a decision scenario; feedback/predictive value. Signup and view all the answers

What is faithful representation/reliability in financial information?

Information can be depended on—complete, neutral, free from error. Signup and view all the answers

What are the enhancing characteristics of financial statements?

Comparability, verifiability, timeliness, understandability. Signup and view all the answers

What is comparability in financial reporting?

From period to period what they're doing. Signup and view all the answers

What does verifiability refer to in accounting?

Verifying from outside auditors. Signup and view all the answers

What does timeliness mean in financial reports?

Making sure it's up to date, not outdated. Signup and view all the answers

What is understandability in financial reporting?

Financial info can be understood by a person whose intention is to understand it. Signup and view all the answers

What does the cost constraint principle indicate?

Benefits must be greater than costs. Signup and view all the answers

What are assets?

Resources that will provide a future benefit. Signup and view all the answers

What are liabilities?

Obligations requiring a future sacrifice of a resource. Signup and view all the answers

What is equity in accounting?

The difference between assets and liabilities. Signup and view all the answers

What is contributed capital?

Resources exchanged for ownership interest. Signup and view all the answers

What are retained earnings?

Profits earned and retained in the business. Signup and view all the answers

What are dividends?

Portion of profits distributed to the owners. Signup and view all the answers

What are revenues?

Increase of assets due to the sale of goods/services. Signup and view all the answers

What are expenses in accounting?

Decrease in assets due to sale of goods/services. Signup and view all the answers

What is the revenue recognition rule?

Revenue is recognized when it is earned; sale is complete, and collection is expected. Signup and view all the answers

How is net income calculated?

Revenues minus expenses. Signup and view all the answers

What is the accounting equation for assets?

Assets = Liabilities + Stockholders' Equity. Signup and view all the answers

Match the financial statements with their purposes:

Income Statement = Success of operations over a period of time Retained Earnings Statement = Changes in R/E balance Balance Sheet = Snapshot at a point in time Statement of Cash Flows = Cash effects of operations, investing & financing activities Signup and view all the answers

What is the order of financial statements?

<ol> <li>Income Statement, 2. Retained Earnings Statement, 3. Balance Sheet, 4. Statement of Cash Flows.</li> </ol> Signup and view all the answers

What is an income statement?

Revenues and expenses reported; shows success of operations over time. Signup and view all the answers

What does the retained earnings statement indicate?

Net income/net loss; dividends paid and changes in R/E balance. Signup and view all the answers

What is a balance sheet?

Shows assets equal to liabilities plus stockholders' equity. Signup and view all the answers

What is the statement of cash flows?

Reconciles beginning cash with ending cash; shows cash effects of operations. Signup and view all the answers

What are the 3 kinds of business activities?

Financing activities, investing activities, and operating activities. Signup and view all the answers

What do financing activities involve?

Borrowing or acquiring funds (e.g., bank loans, ownership contributions). Signup and view all the answers

What are investing activities?

Asset/resource acquisition. Signup and view all the answers

What do operating activities include?

Revenue from sales/services and expenses associated with earning revenue. Signup and view all the answers

Study Notes

Accounting Concepts and Principles

Accounting is the process of identifying, measuring, and communicating financial information to support informed decisions.
Economic entity assumption separates the financial activities of an entity from its owners.
The time period assumption allows accountants to capture and report economic information over specific periods, such as monthly or annually.
Monetary unit assumption means that only transactions expressible in monetary terms are recorded.
The going concern assumption presumes that a business will continue to operate in the foreseeable future.

Fundamental Principles

Historical Cost Principle records assets at their original verifiable cost, reflecting actual expenditure.
Revenue recognition principle dictates that revenue is recognized when earned, meaning services have been performed, and goods delivered.
Expense recognition principles (matching principle) require expenses to be matched with the revenues they help produce within the same period.

Qualitative Characteristics of Financial Information

Conservatism advises caution in reporting to avoid overstating income or assets amid uncertainty.
Relevance involves providing information that influences decisions, enhancing feedback and predictive value.
Faithful representation requires information to be complete, neutral, and free from error.

Enhancing Characteristics

Enhancing characteristics include comparability (consistency across periods), verifiability (assured by external auditors), timeliness (relevance to the current period), and understandability (clear information for users).

Accounting Constraints

Cost constraint asserts that benefits of reporting information should outweigh the costs incurred.

Key Accounting Entities

Assets are resources expected to provide future economic benefits, including cash, accounts receivable, and inventory.
Liabilities represent obligations due in the future requiring resource sacrifice.
Equity is the residual interest in an entity's assets after deducting liabilities, reflecting ownership claim.

Components of Equity

Contributed capital represents resources exchanged for ownership interest.
Retained earnings are profits retained within the business, reinvested rather than distributed as dividends.
Dividends are distributions of profits to owners.

Revenue and Expenses

Revenues represent increases in assets from selling goods/services, while expenses denote decreases due to related costs.
Net income is calculated as revenues minus expenses.

Financial Statements

Financial statements are presented in the following order:
- Income statement reflects revenues and expenses over a specific period.
- Retained earnings statement tracks net income or loss, dividends, and changes in retained earnings.
- Balance sheet shows the relationship where assets equal liabilities plus stockholders' equity.
- Statement of cash flows details cash movements from operating, investing, and financing activities.

Business Activities

Business activities include:
- Financing activities involve procuring funds through loans, debt securities, or equity contributions.
- Investing activities pertain to the acquisition of assets or resources.
- Operating activities encompass revenue generation from sales/services and associated expenses.

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Description

Explore key concepts in Financial Accounting with these flashcards from Chapter 1. Learn essential terms like 'Accounting', 'Economic Entity Assumption', and 'Time Period Assumption', crucial for understanding the foundation of financial reporting.