FABM 1 REVIEWER
a company will continue to honor
Accounting consists of three basic activities
— it identifies, records, and
communicates the economic events of an
organization to interested users.
1. A company identifies the economic
events relevant to its business.
2. Recording consists of keeping a
systematic, chronological diary of
events, measured in dollars and
cents.
3. Finally, the company communicates
the collected information to interested
users by means of accounting
reports. The most common of these
reports are called financial
statements.
 Report recorded data in a
standardized way
 Accumulate information from
similar transactions
 Accumulates all sales
transactions over a certain
period of time’
A vital element in communicating economic
events is the accountant’s ability to analyze
and interpret the reported information.
Interpretation involves explaining the uses,
meaning, and limitations of reported data.
The accounting process includes the
bookkeeping function. Bookkeeping usually
involves only the recording of economic
events.
Internal Users – managers who plan,
organize, and run the business
Managerial Accounting – internal reports to
help users make decisions about their
companies
Luca Pacioli – Father of Accounting
External Users – individuals and
organizations outside a company who want
financial information about the company
Financial Accounting – provides economic
and financial information for external users.
The information needs of external users vary
considerably.
 Taxing authorities want to know
whether the company complies with
tax laws.
 Regulatory agencies want to know
whether the company is operating
within prescribed rules.
 Customers are interested in whether
product warranties and support its
product lines.
 Labor unions want to know whether
the owners have the ability to pay
increased wages and benefits.
Ethics – standards of conduct by which
actions are judged as right or wrong, honest
or dishonest, fair or not fair
Generally Accepted Accounting
Principles (GAAP) – accounting standards
that are generally accepted and universally
practiced
Financial Accounting Standards Board
(FASB) – primary accounting standard-
setting body in the United States
Securities and Exchange Commission
(SEC) – oversees financial markets and
accounting standard-setting bodies
Convergence – a process in which two
standard-setting bodies have made efforts to
reduce the differences between U.S. GAAP
and IFRS
Measurement Principles
Relevance – means that financial
information is capable of making a difference
in a decision
Faithful Representation – means that the
numbers and descriptions match what really
existed or happened
(other info in notebook)
Assets – resources a business owns. The
business uses its assets in carrying out such
activities as production and sales. The
common characteristic possessed by all
assets is the capacity to provide future
services or benefits.
Liabilities – claims against assets in the form
of existing debts and obligations.
These economic activities result in payables
of various sorts:
• Campus Pizza, for instance, purchases
cheese, sausage, flour, and beverages on
credit from suppliers. These obligations are
called accounts payable.
• Campus Pizza also has a note payable to
First National Bank for the money borrowed
to purchase the delivery truck.
• Campus Pizza may also have salaries and
wages payable to employees and sales and
real estate taxes payable to the local
government.
Creditors – all of the persons or entities to
whom a company owes money
Creditors may legally force the liquidation of
a business that does not pay its debts. In that
case, the law requires that creditor claims be
paid before ownership claims.
Owner’s Equity – the ownership claims on
total assets.
Investments – assets that the owner puts
into the business. These investments
increase owner’s equity. They are recorded
in a category called owner’s capital.
Revenues – are the gross increase in
owner’s equity resulting from business
activities entered into for the purpose of
earning income
Drawings – a classification used to
determine the total withdrawals for each
accounting period.
Expenses – cost of assets consumed or
services used in the process of earning
revenue
Basic Equation:
Expanded Equation:
Transactions – a business’s economic
events recorded by accountants
External transactions – involve economic
events between the company and some
outside enterprise.
Internal transactions – economic events
that occur entirely within one company
Financial Statements
Income Statement – presents the revenues
and expenses and resulting net income or
net loss for a specific period of time
 Net income – results when revenues
exceed expenses.
 Net loss – occurs when expenses
exceed revenues
Owner’s Equity – statement summarizes
the changes in owner’s equity for a specific
period of time
Balance Sheet – reports the assets,
liabilities, and owner’s equity at a specific
date
Statement of Cash Flows – summarizes
information about the cash inflows (receipts)
and outflows (payments) for a specific period
of time.
Public Accounting – offering expert service
to the general public, in much the same way
that doctors serve patients and lawyers serve
clients
Auditing – a CPA examines company
financial statements and provides an opinion
as to how accurately the financial statements
present the company’s results and financial
position
Taxation – performed by tax specialists; tax
advice and planning, preparing tax returns,
and representing clients before
governmental agencies such as the Internal
Revenue Service
Management Consulting - ranges from
installing basic accounting software or highly
complex enterprise resource planning
systems, to performing support services for
major marketing projects and merger and
acquisition activities
Private/Managerial Accounting – for-profit
companies
Cost Accounting – finding the cost of
producing specific products
Forensic Accounting – uses accounting,
auditing, and investigative skills to conduct
investigations into theft and fraud