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.