Financial Accounting Chapter 1 Flashcards

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.

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.