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Accounting Ch 1
American Institute of Certified Public Accountants (AICPA) correct answer The professional organization of CPAs; has a strong professional code of ethics designed to instill higher ethical standards in the members of the accounting profession. Annual Interest correct answer The amount of interest to be paid each year. Annual Reports correct answer An annual report is a document that a company publishes each year, containing the financial statements, a description of the company and its operations, an audit report, a management letter, the financial statements containing supporting schedules, and other financial and nonfinancial information. Assets correct answer An asset is an item listed on the left side of the balance sheet that has been acquired by the company in an objectively measurable transaction and has future economic benefit—additional purchasing power, cash, or the ability to generate revenues. Audit Committee correct answer The audit committee is a subcommittee of the board of directors, made up entirely of non-management directors, that works with management to choose the external auditor and monitor the audit so that it is conducted in a thorough, objective, and independent manner. Auditor's Report correct answer The audit report, which is written and signed by the external auditor, states whether, and to what extent, the information in the financial statements fairly reflects the financial performance and condition of the company. See audit. Balance Sheet correct answer The balance sheet is a financial statement that indicates the financial condition of a business as of a given point in time. It includes assets, liabilities, and stockholders ' equity, and it represents a statement of the basic accounting equation. The assets and liabilities are divided into current and noncurrent classifications on the basis of liquidity, and comparisons of assets and liabilities often provide an indication about the company's ability to meet obligations as they come due (i.e., solvency).
"Big 4" correct answer The four public accounting firms that audit most of the large companies in the United States are known as the Big 4. They are Deloitte & Touche, Ernst & Young, KPMG Peat Marwick, and PricewaterhouseCoopers. Board of Directors correct answer The board of directors is a group of individuals, elected annually by the stockholders of a corporation to represent the interests of those stockholders. In addition to setting overall corporate policies, the board has the power to declare dividends, set executive compensation, and hire and fire management. The board also appoints and monitors the compensation committee and audit committees. Certified Public Accountant (CPA) correct answer A certified public accountant (CPA) is an individual who has met a set of educational requirements to sit for the national CPA exam, passed the exam, and met the experience requirements of the states in which he or she practices. Certified public accountants must also pass an ethics exam, periodically participate in continuing education courses, and maintain their membership with the American Institute of Certified Public Accountants (AICPA) CPAs are empowered to sign audit reports. Common Stock correct answer Common stock is a certificate that represents an ownership (equity) interest in a corporation, carrying with it the right to receive dividends if they are declared and the right to vote for the corporation's board of directors at the annual shareholders' meeting. It also carries with it the right to the assets of the corporation, but this right is subordinate to that of the corporate creditors. Issuing common stock is a popular way used by corporations to raise capital. Compensation Contracts correct answer Compensation contracts specify the form and amount of compensation paid to the executives, managers, or employees of a company. Consolidated Financial Statements correct answer Consolidated financial statements include a company's assets and liabilities as well as the assets and liabilities of its majority-owned subsidiaries. See business acquisition and merger. Corporate Governance correct answer Mechanisms that encourage management to report in good faith to - and act in the interest of - the stockholders. Effective corporate governance is critical for an effective financial reporting system. Components of corporate governance include financial information users and capital markets, contracts between management and debt and
Economic Consequences Perspective correct answer Economic consequences perspective is considering and understanding how choices effect the financial statements. Equity correct answer Equity is an ownership interest. Equity holders in a company own common stocks that have been issued by that company. Two rights are associated with owning a common stock—( I ) the right to vote for the board of directors at the annual shareholders' meeting and (2) the right to receive dividends if they are declared by the board. The stockholders' equity section of the balance sheet represents the investment made by the equity holders in the company and is a measure of the assets that would remain for the equity holders after all liabilities have been paid. Ethics correct answer Professional behavior based on the right thing to do. Expenses correct answer An expense is the outflow of assets or the creation of liabilities in an effort to generate revenues for a company. Examples include cost of goods sold. salaries, interest, advertising, taxes, utilities, depreciation, and others. Revenues less expenses is equal to net income—the income statement. While some expenses involve cash outflows, many do not; expenses can also be accrued (e.g., salaries, wages, interest) or the result of cost expirations (e.g., depreciation, amortization). Financial Accounting correct answer Financial accounting is a process through which managers report financial information about an economic entity to a variety of individuals who use this information for various decision-making purposes. The financial accounting process produces the financial statements and the associated footnotes. Financial Accounting Standards Board (FASB) correct answer The Financial Accounting Standards Board (FASB) is the professional body currently responsible for establishing financial accounting standards. The FASB consists of seven well-compensated, full-time individuals who have severed all ties from previous employers and represent many business backgrounds. Since 1973, this private-sector body has issued well over 100 statements of financial accounting standards, covering a wide variety of topics.
Financing Activities correct answer Financing activities are the activities of a company that affect its capital structure. They involve the collection of capital through equity or debt issuances and any related payments such as dividends, debt payments, and treasury stock purchases. Footnotes correct answer Footnotes are descriptions and schedules included in the annual report that further explain the numbers on the financial statements. The footnotes are audited by the independent auditor, and they are considered part of the financial statements. Form 10-K correct answer Audited financial reports; must be filed annually by listed companies. Form 10-Q correct answer Unaudited quarterly financial statements; must be filed quarterly by listed companies. Generally Accepted Accounting Principles (GAAP) correct answer Generally accepted accounting principles (GAAP) are the standards that guide the preparation of financial accounting statements in the United States. See financial accounting standards. Historical Cost correct answer Historical cost is the dollar amount incurred to acquire an asset (investment) or bring it to sellable (inventory) or serviceable (long-lived asset) condition. Historical cost is also referred to as original cost or cost. Income Statement correct answer The income statement is a financial statement, prepared on an accrual basis, indicating the performance of a company during a particular period (usually a quarter or a year). It consists of revenues minus expenses, leading to net income, an important indication of a company's earnings power. Independent Audit correct answer Independent auditors have no personal or financial interest in their clients. To ensure objective audits, the audit profession requires that auditors maintain complete independence from their clients when conducting audits.
Loan Contract correct answer A loan contract is a written agreement describing the terms of a borrowing arrangement, including the timing of cash payments (interest and principal), the maturity date, collateral (security) in case of default, and restrictions on the actions of management (called covenants). Management Letter correct answer The management letter appears in the annual report and normally states that management is responsible for the preparation and integrity of the financial statements. While management letters differ from one company to the next, most contain references to GAAP, ethical and social responsibilities, the quality and reliability of the company's internal control system, the independent audit, and the audit committee of the board of directors. Managerial Accounting correct answer Accounting reports produced for management use only; not available to the public. Net Income (Profit) correct answer Net income is the difference between the revenues generated by a company in a particular time period and the expenses required to generate those revenues. Net income is the "bottom line" of the income statement. Not-for-Profit Accounting correct answer See nonprofit entity. A nonprofit entity is an organization where the operations are not designed to make a profit. Rather, most nonprofit entities generate funds through contributions, user fees, or taxes and use these funds to achieve some organizational or social purpose. Non-profit entities are also referred to as not- for-profit and/or government entities. Operating Activities correct answer Operating activities are the activities of a company associated with the acquisition and sale of a company's products and services. Public Company Accounting Oversight Board (PCAOB) correct answer PCAOB establishes auditing standards used in auditing listed companies. Professional Reputation correct answer Accounting firms history of performing accurate and correct audits.
Profit-Seeking Entities correct answer Companies, business or firms seeking to make a profit. Retained Earnings correct answer Retained earnings is an account listed in the stockholders' equity section of the balance sheet, representing the dollar amount of the company's assets generated through prior profits and not paid out in the form of dividends. Revenues correct answer Revenue refers to inflows or other enhancements of assets of an entity or settlement of its liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations. Sarbanes-Oxley Act correct answer In an attempt to bolster corporate governance and restore confidence in the U.S. financial reporting system, this Act was passed by Congress in 2002. It enacted sweeping changes in the responsibilities of management, financial disclosures, independence and effectiveness of auditors and audit committees, and oversight of' public companies and auditors. The Act requires the principal executive and financial officers to certify that the financial reports have been reviewed, do not contain untrue statements or omit important information, and fairly present the company's financial condition and performance. It also places additional responsibilities on management and the auditor to ensure that adequate internal controls are in place to provide reasonable assurance that the financial records are complete and accurate. Management must also file an annual report on internal control over financial reporting, and the external auditor must attest to and report on management's assessment of internal controls. Securities and Exchange Commission (SEC) correct answer In 1934, the U.S. Congress created the Securities and Exchange Commission, a federal agency with powers to implement and enforce the Securities Act of 1933 and the Securities Exchange Act of 1934. The Securities Act of 1933 requires that companies issuing securities on the public security markets file a registration statement (Form S-1) with the SEC prior to the issuance. The SEC Act of 1934 states that companies with securities listed on the public security markets must (1) annually file audited financial reports with the SEC (Form 10-K), (2) file quarterly financial statements with the SEC (Form 10-Q), and (3) provide audited financial reports annually to the stockholders. The SEC is also currently active in establishing financial accounting standards.
Tax Accounting correct answer Tax accounting systems produce information that is reported to the Internal Revenue Service and is used in the computation of the company's tax liability. User Orientation correct answer A perspective of making decisions based on reading, evaluating, and analyzing financial statements.
