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Information and measurement system that identifies, records, and communicates relevant information about a company's business activities. |
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business activities requires that we keep a chronological log of transactions and events measured in dollars. |
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business activities requires that we prepare accounting reports such as financial statements, which we analyze and interpret. |
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Part of accounting that involves recording transactions and events, either manually or electronically; also called bookkeeping |
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Lenders, Shareholders, Governments, Consumer Groups, Auditors (eternal) Customers |
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Officers, Managers, Internal Auditors, Sales Staff, Budget officers, Controllers |
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Accounting is called the? Why? language of business; |
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language of business; because all organizations set up an accounting information system to communicate data to help people make better decisions |
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business activities requires that we select relevant transactions and events |
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What does accounting consist of? |
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Recordkeeping and business activities requires that we select relevant transactions and events |
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External users of accounting information are |
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not directly involved in running the organization. |
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the area of accounting aimed at serving external users by providing them with general-purpose financial statements. |
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refers to the broad range of purposes for which external users rely on these statements. |
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of accounting information are not directly involved in running the organization. They include shareholders (investors), lenders, directors, customers, suppliers, regulators, lawyers, brokers, and the press. |
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(creditors) loan money or other resources to an organization. Banks, savings and loans, co-ops, and mortgage and finance companies are lenders. Lenders look for information to help them assess whether an organization is likely to repay its loans with interest. |
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(investors) are the owners of a corporation. They use accounting reports in deciding whether to buy, hold, or sell stock. |
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are those directly involved in managing and operating an organization. They use the information to help improve the efficiency and effectiveness of an organization. |
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is the area of accounting that serves the decision-making needs of internal users. Internal reports are not subject to the same rules as external reports and instead are designed with the special needs of internal users in mind. Following is a partial list of internal users and some decisions they make with accounting information. |
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Research and development managers |
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need information about projected costs and revenues of any proposed changes in products and services. |
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need to know what, when, and how much to purchase. |
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need information about employees' payroll, benefits, performance, and compensation. |
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depend on information to monitor costs and ensure quality. |
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need reports for timely, accurate, and efficient delivery of products and services. |
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use reports about sales and costs to target consumers, set prices, and monitor consumer needs, tastes, and price concerns. |
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require information on the costs and benefits of looking after products and services. |
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are beliefs that distinguish right from wrong. |
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1)The goal of accounting is to provide?
2) For information to be useful, it must be |
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1) useful information for decisions.
2) trusted |
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The fraud triangle is a model created by a criminologist that asserts the following three factors must exist for a person to commit fraud, what are they? |
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opportunity, pressure, and rationalization. |
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Financial accounting is governed by concepts and rules known as? |
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generally accepted accounting principles (GAAP) |
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Securities and Exchange Commission (SEC) |
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a government agency, has the legal authority to set GAAP. |
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The SEC also oversees proper use of GAAP by |
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companies that raise money from the public through issuances of their stock and debt. |
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Financial Accounting Standards Board (FASB), |
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a private-sector group that sets both broad and specific principles. |
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International Accounting Standards Board (IASB) |
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an independent group (consisting of individuals from many countries) |
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International Financial Reporting Standards (IFRS) |
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issued by the (IASB) that identifies preferred accounting practices. |
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The measurement principle, also called the cost principle, |
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usually prescribes that accounting information is based on actual cost (with a potential for subsequent adjustments to market). Cost is measured on a cash or equal-to-cash basis. This means if cash is given for a service, its cost is measured as the amount of cash paid. If something besides cash is exchanged (such as a car traded for a truck), cost is measured as the cash value of what is given up or received. |
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General principles consist of at least four basic principles |
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- measurement principle
- revenue recognition principle
- expense recognition principle, also called the matching principle
- full disclosure principle
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Revenue recognition Revenue |
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is the amount received from selling products and services.
provides guidance on when a company must recognize revenue. To recognize means to record it. If revenue is recognized too early, a company would look more profitable than it is. If revenue is recognized too late, a company would look less profitable than it is. Three concepts are important to revenue recognition. (1) Revenue is recognized when earned. The earnings process is normally complete when services are performed or a seller transfers ownership of products to the buyer. (2) Proceeds from selling products and services need not be in cash. A common noncash proceed received by a seller is a customer's promise to pay at a future date, called credit sales. (3) Revenue is measured by the cash received plus the cash value of any other items received.
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expense recognition principle, also called the matching principle |
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prescribes that a company record the expenses it incurred to generate the revenue reported. |
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full disclosure principle |
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prescribes that a company report the details behind financial statements that would impact users' decisions. |
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Accounting Assumptions are?
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- Going concern
- Monetary unit
- Time period
- Business entity
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A sole proprietorship, or simply proprietorship |
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is a business owned by one person in which that person and the company are viewed as one entity for tax and liability purposes |
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is a business owned by two or more people, called partners, which are jointly liable for tax and other obligations. Like a proprietorship, no special legal requirements must be met in starting a partnership. The only requirement is an agreement between partners to run a business together.
It also means unlimited liability for its partners |
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includes a general partner(s) with unlimited liability and a limited partner(s) with liability restricted to the amount invested. |
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limited liability partnership (LLP) |
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restricts partners' liabilities to their own acts and the acts of individuals under their control. This protects an innocent partner from the negligence of another partner, yet all partners remain responsible for partnership debts |
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limited liability company (LLC) |
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offers the limited liability of a corporation and the tax treatment of a partnership (and proprietorship). |
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corporation, also called C corporation |
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A. a business legally separate from its owner or owners, meaning it is responsible for its own acts and its own debts. Separate legal status means that a corporation can conduct business with the rights, duties, and responsibilities of a person.
B. owners, who are called shareholders (or stockholders), are not personally liable for corporate acts and debts. |
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a corporation with special attributes, does not owe corporate income tax. Owners of S corporations report their share of corporate income with their personal income |
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When a corporation issues only one class of stock, we call it? |
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Congress passed the ____ to help curb financial abuses at companies that issue their stock to the public. SOX requires that these public companies apply both accounting oversight and stringent internal controls. The desired results include more transparency, accountability, and truthfulness in reporting transactions. |
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Sarbanes–Oxley Act also called SOX |
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Dodd-Frank Wall Street Reform and Consumer Protection Act |
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includes provisions whose impacts are unknown until regulators set detailed rules. However, a few proposals are notable and include the following:
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Exemption from Section 404(b) of SOX for smaller public entities (whose public value is less than $75 million) from the requirement to obtain an external audit on the effectiveness of internal control over financial reporting.
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Independence for all members of the compensation committee (including additional disclosures); in the event of an accounting restatement, an entity must set policies mandating recovery (“clawback”) of excess incentive compensation.
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Requires the SEC, when sanctions exceed $1 million, to pay whistle-blowers between 10% and 30% of the sanction.
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are resources a company owns or controls. Examples are cash, supplies, equipment, and land, where each carries expected benefits. |
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are what a company owes its nonowners (creditors) in future payments, products, or services. |
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(also called owner's equity or capital) refers to the claims of its owner(s). |
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Equality involving a company's assets, liabilities, and equity |
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Assets = Liabilities + Equity |
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is used to refer to an asset that promises a future inflow of resources |
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Examples are wages payable to workers, accounts payable to suppliers, notes payable to banks, and taxes payable to the government. |
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is the owner's claim on assets, and is equal to assets minus liabilities. This is the reason equity is also called net assets or residual equity. |
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refers to the amount that stockholders invest in the company—included under the title common stock. |
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refer to income (revenues less expenses) that has not been distributed to its stockholders. |
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The distribution of assets to stockholders is called ___, which reduce retained earnings |
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increase retained earnings (via net income) and are resources generated from a company's earnings activities. Examples are consulting services provided, sales of products, facilities rented to others, and commissions from services. |
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decrease retained earnings and are the cost of assets or services used to earn revenues. Examples are costs of employee time, use of supplies, and advertising, utilities, and insurance services from others. In sum, retained earnings is the accumulated revenues less the accumulated expenses and dividends since the company began. |
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Assets = Liabilities + Equity
Equity is Contributed Capital + Retained Earnings
Assets = Liabilities + Common Stock - Dividends + Revenues - Expenses |
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occurs when revenues exceed expenses. Net income increases equity |
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occurs when expenses exceed revenues, which decreases equity. |
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are exchanges of value between two entities, which yield changes in the accounting equation. |
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are exchanges within an entity, which may or may not affect the accounting equation. |
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refer to happenings that affect the accounting equation and are reliably measured. They include business events such as changes in the market value of certain assets and liabilities and natural events such as floods and fires that destroy assets and create losses. |
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describes a company's revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities. |
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Statement of retained earnings |
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explains changes in equity from net income (or loss) and from any dividends over a period of time. |
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describes a company's financial position (types and amounts of assets, liabilities, and equity) at a point in time. |
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identifies cash inflows (receipts) and cash outflows (payments) over a period of time. |
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Accounting information is based on the assumption that a business will continue to operate rather than be closed or sold |
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Means that transactions and events are recorded in money or monetary units |
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Presumes that the life of a company can be divided into time period such as months, quarters or years. |
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Business Entity Assumption |
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Means that a business is accounted for separately from its other business entities, including its owner. |
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What are the three legal forms that a business entity can take? |
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Proprietership
Partnership
Corporation |
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