accounting - chapter 1

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process of identifying, measuring, recording and communicating economic information for effective decision making
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Terms in this set (68)
separate legal entity ("person") owned by stockholders in form of stock - organized under laws of statecorporations (stockholders' equity)ownership is not available to the general publicprivately heldownership is available to the public at large; usually on public exchangepublicly heldcorporate tax structure =higher tax rateadvantages of corporations- greater potential to raise capital - lower legal liability - ownership easily transferreddisadvantages of corporations- complex process to begin/maintain - unfavorable tax treatment - double taxation (if corporation has to pay taxes and stockholders do too) - highest tax rate for corporationsborrow/acquire funds to begin and operate businessfinancing activitiesread notes on financing activitiesbuying assets which are used to generate revenues - asset/resource acquisition to enable a business to operate - relating to a companies investment in long term assets that are used to generate a profit (buildings, land, equipment) - have to have machinery, equipment, etc. with anything related to acquiring those assetsinvesting activitiesoperating the business to earn a profit - day to day services - assuming we are talking about a for profit company (wanting to make money) - all activities we engage in make money (revenues and expenses we are looking at the term to determine the success of the business)operating activitiesresources that will provide a future benefit - examples: cash, accounts receivable, inventory, equipment, etc. (read notes)assetsobligations requiring future sacrifice of a resource - examples: accounts payable, notes payable, taxes payable, etc. (read notes)liabilitiesdifference between assets and liabilities- represents share of assets claimed by the ownersequityresources exchanged for ownership interest - paid in capital = external generate equity, comes as an exchange of ownershipcontributed capitalprofits earned and retained in the business - internally generated equityretained earningsportion of profits distributed to owners - does not fall in any of the five account types - secondary division type to share some of its income with the stockholdersdividendsincrease of assets due to sale of goods/services - measure of our operating activities - happens when you provide a service or deliver goodsrevenuescost of assets consumed or liabilities created due to sale of goods/services - seen within a particular time period - all of the revenues compared to all of the expenses to see if we have been successful or notexpensesbasic accounting equation, used to analyze changes that a company has to a financial statementassets = liabilities + stockholders' equityrevenues and expenses success of operations over time period - telling us whether or not we have been successful over the time period we are looking at - measures its success by that income - hope is that our expenses will be less than our revenues and we will have net incomeincome statementnet income/net loss (more expenses than revenues) dividends and net income over time period - expression of how faithful/careful we have been with our own earnings - how much money have you made and kept in the business?retained earning statementassets = liabilities + SE - a "snapshot" at a point in time (capturing a moment) - in the moment - if one thing happens, the balance sheet is different (where things stand, other portions are telling the story about a period of time) - telling where the company stands at the end of a period of timebalance sheet (stockholder's equity)uses and sources of cash over time period - shown by activitystatements of cash flowsin USA, has power to set accounting rules for publicly traded companiessecurities and exchange commission (SEC)rules/standards all publicly traded companies must follow in the USAgenerally accepted accounting principles (GAAP)internationally, this rule develops this tule - US works closely with international standard-setters. maybe one day they will be the sameinternal accounting standards board (IASB) develops international financial reporting standards (IFRS) - very two different companies: not on the same basis, have to convert the other to comparereports financial position of a company (assets, liabilities, stockholders' equity) at a specific point in time - accounts organized ("classified") into categories according to shared economic similaritiesclassified balance sheetbasic classification of assets is betweencurrent (<1 year) and concurrent (>1 year)what does the company have?assets: - current assets, long-term investments, property, and intangible assets liabilities: - current and long-term liabilities stockholders' equity: - contributed capital and retained earningsbalance sheets convey...important information about the structure of assets, liabilities, and equity, which are used to judge a company's liquiditythe ability to pay obligations as they become dueliquiditysignals that a company has adequate funds with which to pay its current obligations and is expressed in $ amountsworking capitalworking capital equationworking capital = current assets - current liabilitiesalternate measure of liquify that allows comparisons to be made between different companiescurrent ratiocurrent ratio equationcurrent ratio = current assets/current liabilitiesoperating success over a period of time cannot survive long-term with sustained loses past performance suggests the company's ability to earn future incomethe income statementwhat are the 2 major elements of the income statement?revenues: the increase in assets as a result from the sale of products or services expenses: the cost of resources used to earn revenues during a periodcomputes net income in one single stepsingle stepcalculates gross margin and separates operating and non-operating itemsmulti-stepmeasure of your mark-upgross margin (profit)cost of goods soldgross marginoperating expensesincome from operations +nonoperating revenuesnon operating expensesnet income - on slidea company's ability to generate current income is useful in predicting whatits ability to generate future incomewhen investors believe that future income will improve, they do whatbuy stockthe percentage of profit in each $ of salesnet profit marginnet profit margin equationnet profit margin = net income/sales revenuesummarizes and explains the changes in retained earnings during the periodretained earnings statementowners contribute capital in one of two ways:directly and indirectlypurchases of common stockdirectretaining some or all of net income earned in the year rather than paying it out to individuals (dividends)indirectlyincome earned by the company but not paid out in the form of dividends is calledretained earningsretained earnings equationbeginning retaining earnings + net income (loss) - dividends paid = ending retained earningsolder investors seeking cash flow will seek out companies with high dividend payouts other investors would rather know the company has enough capital to pursue growth opportunitiesinvestor perspectivekeenly aware of company's dividend payout - does company have enough cash on hand to repay its debt when it become die if it makes a dividend payout?creditor perspective (look at notes)any cash flows directly related to earning income - day-to-daycash flows from operating activitiesany cash flows related to the acquisition or sale of investments and long-term assets such as property, plant, and equipmentcash flows from investing activitiesany cash flows related to obtaining capital of the companycash flows from financing activities