,C213 Study Guide
accrual basis of accounting, expenses are matched with the related revenues and/or
are reported when the expense occurs, not when the cash is paid.
Chapter 1: Nature and Purpose of Accounting
Describe the purpose of accounting.
Accounting is the recording of the day-to-day financial activities
of a company and the organization of that information into summary
reports used to evaluate the company's financial status.
Describe the three financial statements.
Balance sheet: reveals what a company owns and what it owes
Income statement: provides the accountant's best attempt at measuring the
economic performance of a company
Statement of cash flows: outlines where a company gets its cash and how it
spends that cash
The balance sheet reports a company's assets, liabilities, and owners'
equity.
The income statement reports the amount of net income earned by a
company during a period. Net income is the excess of a company's revenues
over its expenses.
The statement of cash flows reports the amount of cash collected and paid
out by a company in the following three types of activities: operating,
investing, and financing.
Identify users of financial statements for a particular situation.
Financial statements external users lenders, investors, suppliers,
customers, competitors, government agencies, politicians, and
the press.
Internal statements employees, company management
, Financial accounting information helps lenders evaluate the cash flows
a business can be expected to generate in the future in order to repay
loans. Investors use the same type of information to assess the
attractiveness of companies as investments. Managers use financial
accounting data to formulate company goals, to compute bonuses for
employees, and to illuminate company weaknesses. Suppliers,
customers, and employees use financial statements to tell them about
the long-run prospects of a company. Competitors use financial
accounting information to reveal strategic opportunities within their
industry. Government agencies and politicians use financial statement
data to bolster political and regulatory positions for and against
companies. Reporters use financial accounting data as background
information and to indicate which companies are undergoing
significant changes in financial status.
Identify U.S. accounting rules and their origins.
Fasb not legislative
SEC can create laws but allows FASB to set standards
It would be extremely difficult and costly for users to evaluate financial
statements if every company formulated its own set of accounting rules. In
the United States, accounting standards are set by the Financial Accounting
Standards Board (FASB). The FASB is not a government agency; it is a
private body established and supported by the joint efforts of the U.S.
business community, financial analysts, and practicing accountants.
The FASB has no legal power to enforce the accounting standards it sets but maintains
its influence by carefully protecting its prestige and reputation.
In addition to the FASB, other important accounting-related organizations are
the SEC, the AICPA, the PCAOB, the IRS, and the IASB.
The Securities and Exchange Commission (SEC) regulates U.S.
stock exchanges and seeks to create a fair information environment
in which investors can buy and sell stocks without fear that
companies are hiding or manipulating financial data.
The American Institute of Certified Public Accountants (AICPA) is the
professional organization of certified public accountants (CPAs) in the
United States. A CPA is someone who has taken a minimum number
of college-level accounting classes, has passed the CPA exam, and
has met other requirements set by his or her state. A CPA firm is a
accrual basis of accounting, expenses are matched with the related revenues and/or
are reported when the expense occurs, not when the cash is paid.
Chapter 1: Nature and Purpose of Accounting
Describe the purpose of accounting.
Accounting is the recording of the day-to-day financial activities
of a company and the organization of that information into summary
reports used to evaluate the company's financial status.
Describe the three financial statements.
Balance sheet: reveals what a company owns and what it owes
Income statement: provides the accountant's best attempt at measuring the
economic performance of a company
Statement of cash flows: outlines where a company gets its cash and how it
spends that cash
The balance sheet reports a company's assets, liabilities, and owners'
equity.
The income statement reports the amount of net income earned by a
company during a period. Net income is the excess of a company's revenues
over its expenses.
The statement of cash flows reports the amount of cash collected and paid
out by a company in the following three types of activities: operating,
investing, and financing.
Identify users of financial statements for a particular situation.
Financial statements external users lenders, investors, suppliers,
customers, competitors, government agencies, politicians, and
the press.
Internal statements employees, company management
, Financial accounting information helps lenders evaluate the cash flows
a business can be expected to generate in the future in order to repay
loans. Investors use the same type of information to assess the
attractiveness of companies as investments. Managers use financial
accounting data to formulate company goals, to compute bonuses for
employees, and to illuminate company weaknesses. Suppliers,
customers, and employees use financial statements to tell them about
the long-run prospects of a company. Competitors use financial
accounting information to reveal strategic opportunities within their
industry. Government agencies and politicians use financial statement
data to bolster political and regulatory positions for and against
companies. Reporters use financial accounting data as background
information and to indicate which companies are undergoing
significant changes in financial status.
Identify U.S. accounting rules and their origins.
Fasb not legislative
SEC can create laws but allows FASB to set standards
It would be extremely difficult and costly for users to evaluate financial
statements if every company formulated its own set of accounting rules. In
the United States, accounting standards are set by the Financial Accounting
Standards Board (FASB). The FASB is not a government agency; it is a
private body established and supported by the joint efforts of the U.S.
business community, financial analysts, and practicing accountants.
The FASB has no legal power to enforce the accounting standards it sets but maintains
its influence by carefully protecting its prestige and reputation.
In addition to the FASB, other important accounting-related organizations are
the SEC, the AICPA, the PCAOB, the IRS, and the IASB.
The Securities and Exchange Commission (SEC) regulates U.S.
stock exchanges and seeks to create a fair information environment
in which investors can buy and sell stocks without fear that
companies are hiding or manipulating financial data.
The American Institute of Certified Public Accountants (AICPA) is the
professional organization of certified public accountants (CPAs) in the
United States. A CPA is someone who has taken a minimum number
of college-level accounting classes, has passed the CPA exam, and
has met other requirements set by his or her state. A CPA firm is a
