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Financial Accounting, Chapter 1
Terms in this set (49)
3 types of business organizations
1) Sole Proprietorship (single owner)
2) Partnership (2 or more owners)
Sole Proprietorship Advantages (3)
1) Simple to establish
2) Owner controlled
3) Tax advantages
Sole Proprietorship Disadvantages (3)
1) Proprietor (owner) is personally liable
2) Financing may be difficult
3) Transfer or ownership may be difficult
Partnership Advantages (4)
1) Simple to establish
2) Shared control
3) Tax advantages
4) Broader skills and resources
Partnership Disadvantages (2)
1) partners personally liable
2) transfer of ownership may be difficult
Corporation Advantages (3)
1) Easy to transfer ownership
2) greater capital raising potential
3) lower legal liability
Corporation Disadvantages (1)
1) unfavorable tax treatment
2 types of financial users
1) Internal users
Managers who plan, organize and run the business.
They ask: can we afford raises? do we have enough cash to pay dividends? how much can we charge?
Investors and/or creditors
They ask: is the company making an income? how do companies compare? will they be able to pay their bills?
The information system that identifies, records, and communicates economic events to interested users.
(T or F) Accounting data is prepared for two broad groups of users, owners and management.
(T or F) Investors and creditors are examples of internal users of accounting information.
(T or F) As a result of the Sarbanes-Oxley Act of 2002, top management must certify the accuracy of financial information.
1) Borrowing from creditors
2) Selling shares of stock to investors
Details when borrowing from creditors
1) Liabilities are amounts owed to creditors
2) Note payable (bank loan)
3) Bonds payable (debt securities)
Details when selling shares of stock to investors
1) Common stock (total amount paid in by stockholders for the shares they purchased)
2) Dividends (payments to stockholders)
The purchasing of resources (assets) needed to operate the business. i.e. land, building, equipment, cash, investments in other companies
resources owned by the business
The primary activities for which the organization is in business.
the increase in assets resulting from the sale of a product or service in the normal course of business
the cost of assets consumed or services used in the process of generating revenues
when revenues exceed expenses
expenses exceed revenues
Reports success or failure of the company's operations during the period of the statement.
Income Statement Details
1) Summarizes all REVENUE and EXPENSES for the period (month, quarter, or year).
2) Shows the result. Either NET INCOME or NET LOSS.
Retained Earnings Statement
Reports the items that increase or decreased retained earnings during the period of the statement
Retained Earnings Details
1) Reports the amount paid out in DIVIDENDS and amount of net INCOME or LOSS for the period.
2) Shows changes to the retained earnings balance during the period.
3) Time period is the same as the Income Statement
Retained Earnings Statement Pic
Income Statement Pic
Amounts owed to creditors
ownership claim on total assets
Shows relationship between assets, liabilities, and stockholders' equity at a particular date.
Balance Sheet Equation or Basic Accounting Equation
Assets = Liabilities + Stockholders' Equity
Balance Sheet Pic
Statement of Cash Flows
Reports cash inflows and outflows resulting from financing, investing, and operating activities during the period. Another way to define it, the report provides information about cash receipts and cash payments of a business.
Statement of Cash Flows Details
1) Reports the cash effects of a company's operations for a period of time.
2) Shows cash increases and decreases from investing and financing activities.
3) Indicates increase or decrease in cash balance as well as ending cash balance.
Statement of Cash Flows Pic
Interrelation of Statements Pic
Management Discussion and Analysis
Management's view on the company's ability to pay near-term obligations, its ability to fund operations and expansion, and its results of operations
Notes to Financial Statements
1) Clarify information presented in the financial statements.
2) Describe accounting policies or explain uncertainties and contingencies.
A CPA conducts an independent examination of the financial accounting data. He gives an "unqualified" opinion, meaning the auditor has no reservations concerning the material validity of the presented information.
Financial Statements need to be prepared in a what order?
1) Income Statement
2) Retained Earnings Statement
3) Balance Sheet
4) Statement of Cash Flow
The _____________________ shows revenues and expenses for a period of time.
Each report should have what at the top?
Each report should :
-Identify the company
-followed by the statement name
-followed by the period of time covered
On an Income statement, what is listed first?
On an Income statement, what is listed second?
On the Balance Sheet, total everything?
Total Assets should equal Total liabilities plus total stockholders' equity
Kim's Flowers decided to borrow $26,000 from the bank to purchase a new delivery vehicle. How should they categorize this business activity?
as both a financing activity and an investing activity
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