Accounting Chapter 1 Flashcards
Users and Uses of Financial Information
Internal users, external users and ethics in financial reporting
Forms of Business Organization
Sole proprietorship, partnership & corporation.
Sole Proprietorship
A business owned by one person, it is simple to set up and gives you control. - Barber shops, law offices, auto repair shops, farms etc.
Partnerships
A business owned by two or more persons associated as partners. Formed because one individual does not have enough economic resources to initiate or expand the business. - Professional practices, retail and service type businesses, etc.
Corporation
A business organized as a separate legal entity owned by stockholders. Shares of stock are easy to sell (transfer of ownership) it is also easier for corporations to raise funds.
Easier to raise funds
Corporation
Simple to establish (organizational form).
Sole proprietorship and partnership
No personal legal liability (organizational form).
Corporation
Tax advantages (organizational form).
Sole proprietorship and partnership
Easier to transfer ownership (organizational form).
Corporation
Internal users
Are managers who plan, organize and run a business. (Marketing managers, production supervisors, finance directors and company officers.)
External users
Investors & creditors (suppliers and bankers) use accounting information to evaluate the risks of selling on credit or lending money.
Taxing authorities
IRS wants to know whether the company complies with the tax laws.
Customers are interested in honoring product warranties.
Labor unions - ability to pay increased wages and benefits
Regulatory Agencies - SEC & FTC want to know if the company is operating within prescribed rules.
Sarbanes-Oxley Act
To reduce unethical corporate behavior
Liabilities
Amounts owed to creditors in the form of debit and other obligations
What are Assests?
Resources owned by a business such as the following: Cash Account Receivable Allowances for doubtful accounts Interest Receivable Inventory Supplies Prepaid Insurance Prepaid rent Land Equipment Accumulated Depreciation Equipment Buildings Accumulated Depreciation Buildings Copyrights Goodwill Patents
What is an 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 principals.
What is a Balance Sheet?
A financial statement that reports the assets and claims to those assets at a specific point in time.
Assets, Liabilities and Stockholder’s Equity
What is the basic accounting equation?
Assets = Liabilities + Stockholder’s Equity
What is a CPA?
Certified Public Accountant - an individual who has met certain criteria and is thus allowed to perform audits of corporations.
What is Common Stock?
Term used to describe the total amount paid in by stockholders for the shares they purchase.
What is Accounting?
The information system that identifies, records, and communicates the economic events of an organization to interested users.
What is an Annual Report?
A report prepared by corporate management that presents financial information including financial statements, a management discussion and analysis section, notes, and an independent auditor’s report.
What is a Corporation?
A business organized as a separate legal entity owned by stockholders.
What are Dividends?
Payments of cash from a corporation to its stockholders.
What are Expenses?
The cost of assets consumed or services used in the process of generating revenues such as the following: Administrative Expenses Amortization Expense Bad Debit Expense Cost of Goods Sold Depreciation Expense Freight-Out Income Tax Expense Insurance Expense Interest Expense Loss on Disposal of Plant Assets Maintenance and Repairs Expense Rent Expense Salaries and Wages Expense Selling Expenses Supplies Expense Utilities Expense
What is an Income Statement?
A financial statement that reports a company’s revenues and expenses and resulting net income or net loss for a specific period of time.
Are the company’s operations profitable?
What are Liabilities?
Amounts owed to creditors in the form of debts and other obligations such as the following: Notes Payable Accounts Payable Unearned Service Revenue Salaries and Wages Payable Interest Payable Dividends Payable Income Taxes Payable Bonds Payable Discount on Bonds Payable Premium on Bonds Payable Mortgage Payable
What is 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.
What is Net Income?
The amount by which revenues exceed expenses.
What is Net Loss?
The amount by which expenses exceed revenues
Notes to the Financial Statements
Notes to clarify information presented in the financial statements and provide additional detail.
What is a Partnership?
A business owned by two or more persons associated as partners.
What are Retained Earnings?
The amount of net income retained in the corporation.
What is a Retained Earnings Statement?
A financial statement that summarizes the amounts and causes of changes in retained earnings for a specific time period.
What is Revenue?
The increase in assets or decrease in liabilities resulting from a sale of goods or the performance of services in the normal course of business.
What is a Sole Proprietorship?
A business owned by one person.
What is a 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.
What is stockholder’s equity?
The owner’s claim to assets.
What are the two primary sources of outside funds for corporations?
Borrowing money (debt financing) and issuing (selling) shares of stock in exchange for cash (equity financing).
What are Bonds Payable?
Debt Securities sold to investors that must be repaid at a particular date some years in the future.
In the cases of financial difficulty, creditor claims by be paid before stockholder’s claims.
True
False
True
What are Dividends?
Cash payments to stockholders (as long as there is sufficient cash to cover required payments to creditors).
What do Investing Activities invlove?
They involve the purchase of the resources a company needs in order to operate such as computers, delivery trucks, furniture, and buildings. AKA: assets.
What are the common sources of revenue?
Sales, service and interest.
Classify as an asset, liability, common stock, revenue, or expense.
Cost of renting property
Expense
Classify as an asset, liability, common stock, revenue, or expense.
Truck purchased
Asset
Classify as an asset, liability, common stock, revenue, or expense.
Note payable
Liabilities
Classify as an asset, liability, common stock, revenue, or expense.
Issuance of ownership shares
Common Stock
Classify as an asset, liability, common stock, revenue, or expense.
Amount earned from performing service
Revenue
Classify as an asset, liability, common stock, revenue, or expense.
Amounts owed to suppliers
Liabilities
Amounts received from issuing stock are revenues.
True
False
False
Amounts paid out as dividends are not expenses
True
False
True
Are dividends reported on the income statement?
No
A company striving for rapid growth will pay high dividends
True
False
False. They will pay low or no dividends. (Google, Facebook).
How can users evaluate dividend payment practicies?
By monitoring the retained earnings statement.
If a company’s revenue exceeds its expenses it will report:
Net Income
Net Loss
Net Income
State whether each of the following items is most closely associated with the management discussion and analysis (MD&A), the notes to the financial statements, or the auditor’s report.
Description of significant accounting policies
Notes
State whether each of the following items is most closely associated with the management discussion and analysis (MD&A), the notes to the financial statements, or the auditor’s report.
Unqualified Opinion
Auditor’s Report
State whether each of the following items is most closely associated with the management discussion and analysis (MD&A), the notes to the financial statements, or the auditor’s report.
Explanations of uncertainties and contingencies
Notes
State whether each of the following items is most closely associated with the management discussion and analysis (MD&A), the notes to the financial statements, or the auditor’s report.
Description of ability to fund operations and expansion
MD&A
State whether each of the following items is most closely associated with the management discussion and analysis (MD&A), the notes to the financial statements, or the auditor’s report.
Description of results of operations
MD&A
State whether each of the following items is most closely associated with the management discussion and analysis (MD&A), the notes to the financial statements, or the auditor’s report.
Certified Public Accountant
Auditor’s Report
The Hershey Company, located in Hershey, Pennsylvania, is the leading North American manufacturer of chocolate. Its products include Hershey’s Kisses, Reese’s Peanut Butter Cups, Kit Kat, and Take 5 bars. Imagine that you are considering the purchase of share of Hershey’s common stock.
What financial statements should you evaluate?
Before you invest, you should evaluate the income statement, retained earnings statement, balance sheet, and statement of cash flows.
The Hershey Company, located in Hershey, Pennsylvania, is the leading North American manufacturer of chocolate. Its products include Hershey’s Kisses, Reese’s Peanut Butter Cups, Kit Kat, and Take 5 bars. Imagine that you are considering the purchase of share of Hershey’s common stock.
What should these financial statements tell you?
You would probably be most interested in the income statement because it tells about past performance and this gives an indication of future performance. The retained earnings statement provides a record of the company’s dividend history. The balance sheet reveals the relationship between assets and liabilities. The statement of cash flows reveals where the company is getting and spending its cash. This is especially important for a company that wants to grow.
The Hershey Company, located in Hershey, Pennsylvania, is the leading North American manufacturer of chocolate. Its products include Hershey’s Kisses, Reese’s Peanut Butter Cups, Kit Kat, and Take 5 bars. Imagine that you are considering the purchase of share of Hershey’s common stock.
Do you care if the financial statements have been audited?
You would want audited financial statements. These statements indicate that a CPA has examined and expressed an opinion that the statements present fairly the financial position and results of operations of the company. Investors and creditors should not make decisions without studying financial statements.
Income Statement Equation
Revenue - Expenses = Net Income
Retained Earnings Equation
Beg Retained Earnings + Net Income - Dividends = End Retained Earnings
Balance Sheet Equation
Assets = Liabilities + Equity
What is the Order of the 4 Financial Statements?
Income Statement
Retained Earnings
Balance Sheet
Cash Flow
