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Terms in this set (19)
define financial accounting
the communication of financial information about an organization that parties (usually outside parties) can make wise decisions about the organization. by reporting the organization's past and present, financial accounting enables decision makers to anticipate the organization's future.
in general, when a decision maker studies financial accounting information to make a decision about an organization, what is that party interested in discovering?
this information helps decision makers judge the financial health and future prospects of an organization. often, the decision maker hopes to anticipate how the value of the organization will change over time. will the size and value increase and, if so, how quickly? or, put in another way, which organizations will be able to grow the fastest?
what are the two most likely decisions that outsider parties make about an organization after studying financial accounting information?
first, decision makers study an organization to decide whether either partial or complete ownership is a good idea. should shares of the ownership be bought/ sold/ retained?
second, others want to know whether to provide credit (such as give a loan or sell on credit) to the organization
what is the diff bet financial accounting and managerial accounting?
financial accounting provides financial information about an organization as a whole. most of those decision makers are outside of the company. they are trying to decide whether to (a) hold or obtain ownership shares or (b) provide a loan or credit. managerial accounting provides information to address individual decisions mostly made by people inside the organization. with managerial accounting, there is no limit to the number of possible questions: what to pay workers, what to charge for a product, etc.?
three types of legal recognition that are most common for business organizations in the united states
(a) a business organization can seek and receive official recognition from the state government and be deemed a corporation
(b) a business organization might not seek official recognition from the state. in that case, if there is more than one owner, it is legally a partnership.
(c) a business organization might not seek official recognition from the state. if there is only one owner, it is a sole proprietorship.
for each of the three types of legal recognition for an organization, what is the relationship of the owners to the organization?
in a corporation, the owners and the organization are separate. a corporation is viewed as a separate legal entity. unless otherwise set up contractually, the owners are not responsible for the debts and losses of a corporation.
in both a partnership and a sole proprietorship, there is no separation of the organization and its ownership. unless otherwise stated, if a partnership or sole proprietorship owes money, the owners are responsible.
a corporation can grow by issuing shares of its ownership in exchange for cash or other assets. what are those shares called?
shares of the ownership of a corporation are generally known as capital stock. more than one type of capital stock exists. every corporation issues capital shares known as common stock. a few corporations also issue capital shares- with specified rights- known as preferred stock.
a corporation is getting its business started and issues a total of 100 shares of its capital stock to several people who want to be stockholders. the corporation then issues another 60 shares of capital stock to Ms. Jones for $30 per share. by acquiring these shares, what does Ms. Jones get?
in acquiring capital stock, Ms. Jones has a right to a portion of dividends the corporation might distribute. Ms. Jones also has a right to vote for the members on the board of directors. in addition, Ms. Jones has a right to share in any property left over if the corporation ever goes out of business and liquidates. these specific benefits can vary a bit based on the laws of the individual state where incorporation originally took place and the type of capital stock that was issued. for most capital stock, these are the rights obtained.
all corporations issue common stock. a few also issue a second type of capital stock known as preferred stock. the rights of the holders of common stock are set by the laws of the state of incorporation. what rights do the owners of the preferred stock receive?
the holders of a corporation's common stock are entitled to several specific rights as established by the state government where the organization was originally incorporated. the holders of a corporation's preferred stock are entitled to the rights specifically stipulated on the stock contract. for example, preferred stock holders are often entitled to a specific dividend payment.
a dividend is the distribution of cash (or v occasionally some other property) from a corporation to its ownership as a sharing of profits. it is a reward for the owners. younger businesses that want to grow often distribute few (if any) dividends. older businesses that are well established tend to pay larger dividends as profits and cash balances rise. fast growth is not as important for older organizations.
Ms. Garcia acquires 100 shares of the capital stock of Company X. that is a small percentage of the outstanding ownership so Ms. Garcia is not able to control or apply significant influence over this company. how does she hope to benefit from this investment?
owners of a company's capital stock usually hope to benefit in two ways.
first, if a cash dividend is ever distributed, owners will be entitled to receive a portion of that dividend based on the percentage of shares that are owned.
second, if the company grows and prospers, it is likely that the price of the stock will rise and can be sold by the owner for a profit.
most investors buy stock with the hope of cash dividends and possible stock appreciation
Ms. Haskins is thinking about buying 100 shares of the outstanding capital stock of the central north corporation for $50 per share. she studies the financial accounting information provided by this company. what does she hope to anticipate?
financial accounting uses the past to try to anticipate the amount of dividends (if any) that will be distributed and the future market price of the capital stock shares. a healthy and prosperous company should be able to pay dividends in the future and still grow (causing the stock price to climb.) (in simplest terms, this is all financial accounting does).
Ms. Abrams is thinking about loaning money to the red corporation. she studies the financial accounting information provided by this company. what does she hope to discover?
a decision maker who is considering giving a loan (or credit) to an organization is interested in looking at the financial accounting information for one reason. the potential creditor wants to be able to anticipate the amount of future cash flows that the organization can generate. thus helps the decision maker assess the risk that the debt will not be repaid.
who votes to elect a corporation's board of directors?
the stockholders vote to elect the members of the board of directors. normally, each share of capital stock is equal to one vote. thus, a person who holds 75 shares of capital stock has 75 votes when selecting the board of directors.
what is the responsibility of the board of directors within the organization of a corporation?
a board of directors represents the stockholders in overseeing the operations of an organization and its management. the board of directors has the authority to hire and fire members of the management. it also addresses policy decisions. no individual stockholder can watch over a large corporation so a board of directors is appointed to serve that purpose.
Mr. NaTrom buys a share the capital stock of ace corporation on the first day of the current year for $50 in cash. near the end of the year, ace corporation distributes a $2 per share cash dividend. on the last day of the year, the stock is selling for $53 per share on a stock market (such as the new york stock exchange). what is owner's annual rate of return on this investment?
the investor paid $50 at the beginning of the year for this capital stock. at the end of the year, the investor holds cash of $2 and a share of capital stock worth $53. the value of the investment started the year at $50 and is now $55 (stock plus cash). that is a growth of $5 ($55 - $50) which is a return on the investment for that year of $5/$50 or 10 percent.
financial accounting conveys financial information. what is financial information?
financial information provides details that describe an organization and its operations. this financial information is stated in monetary terms and, where possible, is objective (capable of being proven). the information that is included should report the past and present so that decision makers can anticipate the future.
what are examples of financial information that might be communicated by a financial accountant?
there could be thousands of examples of financial information including the following.
--Merchandise was sold this past year for a total of $333,000.
--A piece of land was bought at a total cost of $55,000.
--A loan of $200,000 is owed to the bank.
--A dividend of $40,000 was distributed to owners of capital stock.
The information describes the organization as a whole.
an outside decision maker wants to locate financial information about a particular company. where can that be found?
financial accounting information can be found in many different ways. one common method is through an organization's annual report. this is often published and distributed. more recently, annual reports are made available on an organization's website. an annual report contains considerable data including financial accounting information.
pick a company. look at its website (under a section such as "Investor Information") and see what you can learn.
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