Upgrade to remove ads
Accounting Exam 1 (Mizzou)
Terms in this set (43)
What is financial accounting? who are the primary users of financial accounting?
- communication of information about business or other type of organization so that you can assess its financial wealth and future prospects
- shareholders, investors, creditors, lenders or government
what is interest?
the charge for using money over time (long term loans)
what does incorporation mean?
legal process by which owners at an organization apply to a state government to have it identified as an entity legally separate from its owners
- corporations are the legal form of most businesses of any size in the US
besides a corporation, what other legal forms can a business use to separate?
- sole proprietorship
- limited liability company
What is the owner of a corporation called?
- shareholders or stockholders
what do shareholders elect to represent them in a company?
board of directors
What is appreciation of capital stock?
increase in the price or value of assets
Can you calculate a rate of return on a stock that has appreciated and paid dividends?
(total return + 1) ^1/years - 1
Name three predictions that individuals might make using financial information
- cash flow
- balance sheets
- income sheets
what is financial information?
used by investors to determine if a companys stock price will go up?
- example: financial statements
what are dividends?
payments made by a company to owners of the company's stock
- reward for being an owner of a business that is prospering
What is materiality?
the magnitude of an omission or misstatement of accounting information that makes it probable that the judgement of a reasonable person relying on the information would have been changed or influenced by that omission or misstatement
what is the difference between an error and fraud?
error is an unintentional misstatement of financial information and fraud is INTENTIONAL misstatement of financial information
does undercertainty with regard to a company's financial position and performance increase or decrease company value?
Why is accounting the language of business?
- it communicates information about a business
- after analyzing properly the information supplied by the accounting statements, the users of the same take decisions for future activities
What is the purpose of accounting standards? What does GAAP stand for?
to ensure that all communicated information is understood properly
- GAAP stands for Generally Accepted Accounting Principles
What are the elements of financial statements?
What does articulation of financial statements mean?
- balance sheets and the income statements of any company are mathematically described in such a manner that the net income equals the owner's equity for that specific time period
What is the difference between contributed capital and earned capital?
contributed capital is amounts invested in a corporation by individuals or groups in order to attain ownership interests
- earned capital is a company's net income, which it may elect to retain as retained earnings if it does not issue the money back to investors in the form of dividends
Three classifications of cash flow?
- operating activities
- investing activities
- financing activities
Why are gains and losses reported separately from revenues and expenses?
- Unlike gains and losses, revenues and expenses are not opposite financial results of the same activities. ... Expenses can also be recorded into any number of different line items on an income statement to reflect the particular type of expense
difference between sales and cost of goods sold; also called gross margin or markup
difference between sale and price and cost of goods sold
difference between sales price and cost of goods sold on an item of inventory
why is income tax expense last on the income statement?
After the taxable income is determined, the business or individual is liable to pay income tax on that income
is a cost an asset or an expense?
what is conservatism in financial reporting?
anticipating possible future losses but not future gains
- (overstated or understated)
why are revenue and net income so important?
Net income is an accounting measurement that strips away all relevant expenses from a company's revenue to show how much profit is really left. It is a way for investors to look past revenue figures and get a sense of how much revenue a company is retaining
does a company receive money when it shares are sold on an exchange each day?
Liquidity measures equation:
- current ratio and quick ratio
current ratio = current assets / current liabilities
quick ratio = current assets (excluding inventory) / current liabilities
key metric used to measure an enterprise's ability to meet its debt obligations and is used often by prospective business lenders. The solvency ratio indicates whether a company's cash flow is sufficient to meet its short-and long-term liabilities
calculate profitability measures equation:
look up table
Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets
- net income / average total assets
Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders' equity. Because shareholders' equity is equal to a company's assets minus its debt, ROE could be thought of as the return on net assets
- net income (annual) / shareholders equity
Can you disaggregate ROA into the two ways to make money?
Do you know what a transaction is and when to record it?
the events that affect the finances of a business must be recorded on the books
Why is it important to be able to trust financial statements?
The U.S. economy depends on the willingness of investors and creditors to risk their hard-earned financial resources by conveying it to organizations. Financial statements play an important role in providing the information that allows such decisions to be made
What is the role of the SEC?
The U. S. Securities and Exchange Commission (SEC) has a three-part mission: Protect investors. Maintain fair, orderly, and efficient markets. Facilitate capital formation
What does the FASB do?
The Financial Accounting Standards Board (FASB) is a private, non-profit organization standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles (GAAP) within the United States in the public's interest
Why do we need auditors?
Auditors attest that a company's financial records and accounting procedures comply with the law. They conduct reviews of financial statements and records to confirm publicly held companies meet their legal requirements under U.S. laws.
Why do we need internal control?
Effective internal control reduces the risk of asset loss, and helps ensure that plan information is complete and accurate, financial statements are reliable, and the plan's operations are conducted in accordance with the provisions of applicable laws and regulations
Diversification refers to having varied types of individual assets within an asset class
what is an IPO?
Initial Public Offering
- stock in primary markets
YOU MIGHT ALSO LIKE...
Accounting Test #1
BUS10: Ch. 12 Review
Accounting Chap 2
OTHER SETS BY THIS CREATOR
Bio Capstone 4982W Exam 2
Management 3000: Quizzam 2 (Timothy Wade)
Marketing 3000 Keene Midterm
Bio 4982W Exam 1 (Mizzou)