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37 terms

Chapter 1 accounting

STUDY
PLAY
Describe the Primary forms of Business Organization?
Three Types of Business Organizations: Sole Proprietorship, Partnership, or Corporation
Sole Proprietorship
Business owned by one person
Advantages
-Simples to establish
-owner controlled
-tax advantage
Disadvantage
-Proprietor personally liable
-financing may be difficult
-transfer of ownership may be difficult
(barber shops, auto repairs shops, and small retail stores)
Partnership
Business owned by two or more people
Advantages
-Simples to establish
-Shared control
-tax advantages
-Broader skills and recourses
Disadvantage
-Partners personally liable
-transfer of ownership may be difficult
(professional practices, lawyers,architects, and accountants)
Corporation
A business organized as a separate legal entity having ownership divided into transferable shares of stock.
Advantages
-Easy to transfer ownership
-Greater capital raising potential
-lower legal liability
Disadvantages
-unfavorable tax treatment
Accounting
The information system that identifies, records, and communicates the economic events of an organization to interested users.
Annual report
A report prepared by corporate management that presents financial information including financial statements, notes, a management discussion and analysis section, and an independent auditor's report.
Assets
Resources owned by a business, which are expected to proved a value or service to the business at some future point in time.
Must equal to liabilities plus stockholders' equity.
-Cash and short-term investments
-Prepaid expenses
-Inventories
-Receivables
auditor's report
A report prepared by an independent outside auditor stating the auditor's opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with generally accepted accounting standards.
-Auditor or a CPA, a professional accountant, who conducts an independent examination of the financial accounting data presented by a company.
-Auditor gives an "unqualified" opinion, meaning the auditor had no reservation concerning the material validity of the presented information, if the financial statement present the financial position, results of operations, and cash flows in accordance with accepted accounting standards.
**The element of the annual report that presents an opinion regarding the fairness of the presentation of the financial position and results of operations
Balance sheet
A financial statement that reports the assets and claims to those assets at a specific point in time. Presents a picture at a point in time of what a business owns and what it owes.
Shows relationship between assets, liabilities, and stockholders' equity at a particular date.
-In an equation form (Assets = Liabilities + Stockholders' Equity)
Referred to as the basic accounting equation
**presents information as of a specific point in time
-Supplies on hand at the end of the year.
-Total debts outstanding at the end of the period.
Basic accounting equation
Assets = Liabilities +Stockholders Equity's
Certified Public Accountant (CPA)
An individual who has met certain criteria and is thus allowed to perform audits of corporations.
Common stock
Term used to describe the total amount paid in by stockholders for the shares they purchase.
Retained earnings
The amount of net income retained in the corporation.
Ending retained earning (reported on the retained earnings statement) is also reported on the balance sheet.
Dividends
Payments of cash from a corporation to its stockholders.
Expenses
The cost of assets consumed or services used in the process of generating revenues.
The cost of assets consumed in the process of earning revenue.
-Cost of goods sold
-Selling, general, and administrative expenses
-Interest expense
Income statement
A financial statement that presents the revenues and expenses and resulting net income or net loss of a company for a specific period of time.
Shows how successfully a business performed during a period of time.
summarizes all revenues and expense for period (month, quarter, or year)
-Revenue during the period.
Liabilities
The debts and obligations of a business. Liabilities represent the amounts owed to creditors.
-Creditors claims (obligations or debts of the business) on total assets for resources or service provided to the business in the past.
Liabilities are existing debts and obligations.
-Income taxes payable
-Accounts payable
Management discussion and analysis (MD&A)
A section of the annual report that presents management's views on the company's ability to pay near-term obligations, its ability to fund operations and expansion, and its results of operations.
Covers various financial aspects of a company
-Ability to pay near-term obligations
-ability to fund operations and expansion
-Results of operations
Net income
The amount by which revenues exceed expenses.
Net income from the income statement is added to beginning retained earning to determine ending retained earning.
Net loss
The amount by which expenses exceed revenues.
Notes to the financial statements
Notes that clarify information presented in the financial statements, as well as expand upon it where additional detail is needed.
-Clarify information presented in financial statements
-Describe accounting policies or explain uncertainties and contingencies.
**The element of a corporation's annual report that describes the corporation's accounting methods
Retained earnings statement
A financial statement that summarizes the amounts and causes of changes in retained earnings for a specific period of time.
Indicates amount paid out in dividends and amount of net income or net loss for period.
Shows changes in retained earning balance during period covered by statement.
Time period is the same as that covered by income statement.
Revenue
The increase in assets that result from the sale of a product or service in the normal course of business.
Indicates how much income was distributed as dividends and how much was retained in business.
The increases in assets resulting from the sale of a product or serive in the normal course of business.
-Sales revenue
-Franchising revenues
Sarbanes-Oxley Act
Regulations passed by Congress in 2002 to try to reduce unethical corporate behavior.
Statement of cash flows
A financial statement that provides financial information about the cash receipts and cash payments of a business for a specific period of time. Shows sources of cash during a period of time and how the cash was used.
Reports cash inflow and outflow resulting from financing, investing, and operating activities during the period.
-Cash received from issuing new bonds during the period.
Stockholders' equity
The owners' claim on total assets.
Is equal to total assets minus total liabilities.
Users and uses of accounting information
Two categories: Internal users and external users
External users- investors, creditors
Internal users- finance, human resources, marketing, management
Ethics in Financial Reporting
Sarbanes-Oxley Act (SOX) OF 2002 Requires
-Top management to certify accuracy of financial information
-sever penalties for fraudulent financial activity
-Increased independence of auditors
-increased responsibility for board of directors
Three Principal types of business activity
-Financial activities
-Investing activities
-Operating activities
Accounting information system keep track of the results of each of these business activities.
Financial activities
To start or expand a business the owner or owners quite often need cash from outside sources
Two primary sources:
Borrowing from Creditors: - Liabilities are amount owed to creditors
-Note payable (bank loan)
-Bonds payable (debt securities)
Selling shares of stock to investors:
-Common stock (total amount paid in by stockholders for the shares they purchased)
-Dividends (payments to stockholders)
Investing activities
investing activities involve the purchase of resources (assets) needed to operate the business
Typical assets include: land, building, equipment, cash, investments in debt or equity securities of another company
Operating activities
Comprise the primary activities for which the organization is in business
-Revenue is the increased in assets resulting from the sale of a product or service in the normal course of business
-Expense are the cost of assets consumed or services used in the process of generating revenues
-Net income results when revenues exceed expenses
-Net loss results when expenses exceed revenues
Note payable
Written promises to pay stated sums of money at future dates, classified as current (if due within 12 months) or non-current (if due after 12 months) of the balance sheet date.
Who are the external users of accounting information?
They are not directly involved in running the organization and include shareholders, lenders, directors, customers, suppliers, regulators, lawyers, brokers, and the press.
Who are the internal users of accounting information?
They are directly involved in managing and operating an organization and include research and development managers, purchasing managers, human resource managers, production managers, distribution managers, marketing managers, and service managers.
Describe the Content and Purpose of each of the Financial Statements
-Balance sheet
-Income statement
-Retained earnings statement
-Statement of Cash Flows
Describe the components that supplement the financial statements in an Annual Report
-Management Discussion and Analysis
-Notes to financial statements
-Auditors Report