1 Foundations of Financial Accounting Free Online FlashCards

What does financial accounting do?

It identifies, records, and summarizes an organization’s financial activities in reports that help users make decisions.

What are assets?

Economic resources the business controls, such as cash, equipment, or amounts customers owe.

What are liabilities?

Obligations the business owes to others, such as loans or unpaid bills.

What is equity?

The owners’ residual claim on the business after liabilities are subtracted from assets.

State the fundamental accounting equation.

Assets equal liabilities plus equity: $\text{Assets} = \text{Liabilities} + \text{Equity}$.

What qualifies as a business transaction?

An economic event that can be measured and changes the business’s financial position.

How does a transaction affect the accounting equation?

It affects at least two parts of the accounting equation, keeping the equation in balance.

What happens when equipment is bought with cash?

Equipment increases while cash decreases by the same amount, so total assets and equity do not change.

How does a $\$10{,}000$ owner cash contribution affect the equation?

Cash, an asset, increases by $\$10{,}000$, and owner’s equity increases by the same amount.

How does the balance sheet’s time frame differ from period statements?

The income statement and statement of cash flows report activity over a period; the balance sheet reports financial position on a particular date.

What does the statement of changes in equity explain?

It explains how owners’ claims changed during the period.

What three categories organize cash flows?

Operating, investing, and financing activities.