Accounting Chapter 1Accounting: is the information system that measures business activities, processes the information into reports, and communicates the results to decision makers. Financial Accounting: provides information for external decision makers, such as outside investors, lenders, customers, and the federal governmentManagerial Accounting: focuses on information for internal decision makers, such as the company’s managers and employees.Creditor: Any person or business to whom a business owes money. Before extending credit to a business, a creditor evaluates the company’s ability to make the payments by reviewing its financial statements.Internal Revenue Service (IRS): without good records, the IRS can disallow tax deductions, resulting in a higher tax bill plus interest and penalties.Certified Public Accountants, or CPAs are licensed professional accountants who serve the general public. CPAs work for public accounting firms, businesses, government entities, or educational institutions.Certified Management Accountants, or CMAs are certified professionals who specialize in accounting and financial management knowledge. Generally, CMAs work for a single companyFinancial Accounting Standards Board (FASB): a privately funded organization, oversees the creation and governance of accounting standards. Securities and Exchange Commission (SEC): The SEC is the U.S. governmental agency that oversees the U.S. financial markets. It also oversees those organizations that set standards (like the FASB). Faithful representation: Information that is complete, neutral, and free from error. Generally Accepted Accounting Principles (GAAP): rests on a conceptual framework that identifies the objectives, characteristics, elements, and implementation of financial statements and creates the acceptable accounting practices. Economic Entity Assumption: An economic (business) entity is an organization that stands apart as a separate economic unit. We draw boundaries around each entity to keep its affairs distinct from those of other entities. An entity refers to one business, separate from its owners.Corporation: is a distinct entity from a legal perspective. It is an entity that exists apart from its owners, who are called the stockholders or shareholders.Incorporators: create a corporation by obtaining a charter from the state, which includes the authorization for the corporation to issue a certain number of shares of stock, which represent theownership in the corporation. They pay fees, sign the charter, and file the required documents with the state. Stockholders: have the ultimate control of the corporation, who normally receive one vote for each share of stock they own. The stockholders elect the members of the board of directors, which sets policy for the corporation and appoints the officers. The board elects a chairperson, who usually is the most powerful person in the corporation. The board also designates the president, who as chief executive officer manages day to-day operations. Most corporations also have vice presidents in charge of sales, operations, accounting and finance, and other key areasCost Principle: states that acquired assets and services should be recorded at their actual cost (also called historical cost). The cost principle means we record a transaction at the amount shown on the receipt—the actual amount paid.Going Concern Assumption: assumes that the entity will remain in operation for the foreseeable future. Inflation: The value of a dollar changes over time, and a rise in the price level Monetary Unit Assumption: requires that the items on the financial statements be measured in terms of a monetary unit. (dollars)International Financial Reporting Standards (IFRS): which are published by the International Accounting Standards Board (IASB). IFRS is a set of global accounting standards that are used by more than 116 nations. They are generally less specific and based more on principle than U.S.GAAP. IFRS leaves more room for professional judgment.Audit: an examination of a company’s financial statements and records. TSarbanes-Oxley Act (SOX): intended to curb financial scandals. SOX requires management to review internal control and take responsibility for the accuracy and completeness of their financial reports. In addition, SOX made it a criminal offense to falsify financial statements.Accounting Equation: measures the resources of a business (what the business owns or has control of) and the claims to those resources (what the business owes to creditors and to the owners). Asset: an economic resource that is expected to benefit the business in the future. Assets are something of value that the business owns or has control of. Cash, Merchandise Inventory, Furniture, and Land are examples of assets.Liabilities: are debts that are owed to creditors. Liabilities are something the business owes and represent the creditors’ claims on the business’s assets (many have the word payable in their titles)Equity: (also called stockholders’ equity). Equity represents the amount of assets that are left over after the company has paid its liabilities. It is the company’s net worth. Equity increases with owner contributions known as contributed capital and revenues. Revenues: earnings that result from delivering goods or services to customersExpenses: the costs of selling goods or services. Expenses are the opposite of revenues and, therefore, decrease equity. Equity decreases with expenses and distributions to owners.Dividends: can be paid in the form of cash, stock, or other property. Dividends are not expenses. A corporation may or may not make dividend payments to the stockholders. Dividends are the opposite of owner contributions and, therefore, decrease equity.Contributed capital: (also called paid-in capital) is the amount contributed to the corporation by its owners (the stockholders).Common stock: represents the basic ownership of every corporationRetained Earnings is the equity earned by profitable operations that is not distributed to stockholders. There are three types of events that affect retained earnings: dividends, revenues, and expenses. Dividends represent decreases in retained earnings through the distribution of cash, stock, or other property to stockholders. Revenues are increases in retained earnings from delivering goods or services to customers.Net Income: When revenues are greater than expenses (profit) Net Loss: When expenses are greater