Basic Business and Accounting Flashcards
Define Business Ethics
The principles and standards that define acceptable conduct in business
Define Social responsibility
A businesses obligation to maximize its positive impact and minimize its negative impact on society
Define Ethical Issue
An identifiable problem or situation that requires that a person choose from several actions that may be evaluated as ethically right or wrong
Define loyalty
Employer and employee are mutually loyal to each other
Define veracity
Business is conducted in a truthful manner
Define Defined Benefit Pension
Starts a retirement and provides typically a monthly amount of money, amount of which is determined through a formula based on numerous factors (length of employment)
Cannot be “out-lived”
Define Defined-contribution programs
401-K or Cash Balance Plans
On a monthly basis, employers and employees make a defined amount contribution to a plan that is managed by an insurance company
NO guaranteed income
Veracity was replaced with
Profits at all costs
Most common ethical problems?
Lying
Withholding vital information that could impact a management decision
Abusive/intimidating behavior
Four Categories of ethical issues?
Conflict of interest
Decision maker fairness and honesty
Deceptive communications
Deceptive business relationships
Define conflict of interest
problem occur when a person has to choose whether to advance their own personal interest or those of others
Define Deceptive communication
False or misleading advertising or personnel using deceptive selling techniques eventually anger customers (loss of money)
Define Deceptive business relationship
When the company suppliers do not buy into the corporate standard of ethical behavior and engage in behaviors that will eventually impact the services or products provided by the company
Ethical or Unethical choice in business =
Individual employee standards and values +
Managers and coworkers influences +
Ethical codes and compliance requirements
4 dimensions of the nature of social responsibility
An economic dimension
A legal dimension
An ethical dimension
A voluntary and philanthropic dimension
Sarbanes-Oxley Act
Mandate the establishment of confidential systems so employees could raise issues of possible unethical accounting practices
Holds CEO and chief financial officer responsible for accuracy
Define Generally Accepted Accounting Principles
Rules created so that the same set of procedures are used each time to report transactions and create financial statements
Define Business Entity Concept
Business is treated separately from owner’s personal financials
Define Cost Principle
All goods and services purchased by the business are recorded in the financial statements at actual cost even if the owner thinks they are worth more
Define Continuing Concern Concept
Business is established to remain operating using its assets to contiue operation
Define Objectivity principle
Amounts used in recording transactions must be supported by objective evidence such as invoices
Define Stable dollar concept
We record transactions at the value of the dollar at the time of the transaction and we do not worry about appreciation or depreciation of the buying powder of the dollar
Define Conservatism
Requires that sufficient attention be given to risks taken by the organization and anticipate possible financial losses
Define Matching
Attempt to put expenses into the same accounting period as the revenues that caused the expenses to be generated
**Define Accrual Basis
Need for operating and income statements and cash flow statements
Record revenues when they are INCURRED
We asign the revenues/expenses to the accounting period in which they were earned and with the expenses that helped generate them
**Define Cash Basis
Revenue is reported on the financial statement when it is actually RECEIVED
- Used when business do not know what they will be getting paid
Define Sole Propietorship
One owner
Has to transfer funds or create more net income to increase equity
No legal status and doesn’t exist legally
How do you end a sole proprietorship?
Pay off any debts and end it
Bob Smith is the sole owner of Bob Smith Pharmacy and it is listed at the county court house as a sole proprietorship. If Bob should suddenly die, does the business exist by law?
No
Advantages to Sole Proprietorship?
No formal federal requirements for establishing the business
Owner has complete freedom to establish operating policies, controls and use of money
Personal incentive to do well
Federal taxes are only those required of the owner as an individual
Disadvantages to Sole Proprietorship?
Unlimited personal liability
Ability to acquire a start-up and on-going capital is limited
Define Common Law
Body of law developed by custom or judicial decision sin US courts
Define Statutory law
Body of that develops from legislatures enacting new statutes
Local ordinances
Define Federal law
Apply to all states whereas state statutes only apply within the state’s borders
Define Uniform law
National Conference of Commissioners on Uniform State Laws draft model laws for the states to adopt
Define Uniform Partnership Act
Adopted by all states except one and is a model to use whenever two or more individuals wish to establish a partnership
**Define General Partnership
Governed by common law and statutory law
Voluntary agreement between an “aggregate of people:
Formed by a lawyer
NO LEGAL STANDING
Define Agency
Relationship between two parties in which one party (agent) agrees to represent or act for the other party (principal)
Define Partnership via the UPA
An association of two or more persons to carry on as co-owner’s of a business for profit
Partner cannot become a partner without being invited
Define Aggregate Theory
Property and other assets held by individuals
Lawsuits brought against partners NOT business
Define Entity Theory
Business name can enter into agreements
Assets owned by the business- not affected if a partner leaves
Will Smith and Jack Jones are general partners (50% share each) in Ajax Pharmacy that exists in Corsicana, Texas. Texas is an entity state. If Will and Jack want to expand the business and take a loan, can the loan be in the name of the business?
YES
If Will and Jack do not want to follow the UPA, can they create their own agreement and what is it called?
Yes; Articles of Partnership
Define Articles of Partnership and where is it submitted
Written up by a lawyer and filed with the county clerk’s office
Clearly state how profits and losses would be divided, general responsibilities of the partners, amount to be “drawn” by each partner from personal expenses, limits on each partner to bind the others to an obligation of the business
In Texas, each partner is required to do what?
Make some material contribution to purchase his or her interest in the partnership, not limited to the type of property (cash, real estate) that can be limited
How can a partnership dissolve?
Death, bankruptcy or the inability of a partner to fulfill the stated obligations of the contract unless the partnership aggreement makes specific contigency provisions
Advantages of partnership
Larger potential pool of capital and specialization
Partners contorl their own business activities
Disadvantages of partnerships
Unlimited liability (personal property) Agency (one poor partner can do a lot of damage)
Define Hybrid Forms of Partnerships
Limited Liability Partnerships
Who typically uses LLP?
Attorney’s/physicians/accountants OR by family business
What do you have to do to get an LLP legit?
File a form with the secretary of state and the business name must include the initials “LLP”
File an annual report with the SofS to retain the LLP
Define LLP
Allows professionals to avoid the personal liability for the malpractice of other professional partners
Each partner is liable for his on wrongful acts
BUT if there is a supervising partner for that individual they are liable too
Define FLLP
Family LLP
Agriculture where the business partners are primarily of the same family
Provides exemption from real estate transfer taxes when partnerships real estate is transferred among partners
Define LP
Limited Partnership
Oldest
One general partner + one limited partner
General partner: management responsibility and assumes all debts
Limited partner: contributes case or property,
How do you make an LP?
File with the SofS and must include “LP” in name
Define LLLP
Limited Liability Limited Partnership
Limit all partner liability to the amount of their investments in the business
Define Corporation
Association of 2 or 3 + individuals CHARTERED under the laws of the state to conduct business as an entity, separate from its “owner”
Define Chartered
It is the Articles of Incorporation and is a document htat must be filed with the SofS
Okay so we are chartered, now what?
They must elect a Board of Directors and adopt bylaws to govern how the organization will be run.
What does the Board do?
Appoint officers to carry out the wishes and direction of the Board and manage the day-to-day activities of the business
So what about the people who OWN the business?
They are shareholders not Board members
Business corporations are divided into what?
C and S
All C corporations must include?
The term Corporation, Incorporated, Company or Inc in their name
Advantages of a C Corporation
The duration of a corporation is perpetual unless otherwise stated
Death of a shareholder/Board member/officer does not affect its existence
Officers and shareholders are protected from personal liability
Disadvantages of C Corporation
Double taxation
Define Double taxation
Corporation will be taxed at high corporate rate for earnings and then individual shareholders are taxed as ordinary income from earnings on stock
Define S Corporation
Subchapter S
Passes profits and losses through to its owners similarly to a partnership
No more than 100 shareholders + limitations on who
Avoids double taxation
Define LLC
Limited Liabilities Companies
Tax treatment of a partnership with limited liability advantages of a corporation
LLC is not a partnership nor a corporation? What makes it different?
NO shares, it has interest certificates
No shareholders, it has members
Has an operating agreement
Member’s liability is limited to their investment
Advantage of LLC
Profits are passed through the members and do not reside with the company
Disadvantages of LLC
Limited lifespan (30 years) Member death/withdraw, LLC may dissolve unless there are buy-out provisions in the articles Cannot not freely transfer interest --> hard to increase capital
Bob Smith is the president of Bob Smith Pharmacy, Inc. and it is listed at the county court house as a C corporation with Nancy Smith as Secretary. 100% of the shares are owned by Bob and Nancy. If Bob should suddenly die, does the business still exist by law?
Yes
Define Merchandising Firm
Purchase products at a cost and re-sell to achieve a profit
Must consider cost of purchase + cost of inventory available for re-sale (Cost of Sale)
Define Service Firm
Pharmacists provides “services” rather than a commodity
Administrative/operating expenses need to be allocated if “service role” is done in the pharmacy
Sole Proprietorship Book/Taxes
Income statment information moved to Schedule C or personal 1040 income tax form
Owner cannot hire himself so no owner salary
Withdrawal account for money taken from business for personal expenses
Partnership Books/Taxes
Each partner has a withdrawal account
Income statement infor will be transferred to each partner’s personal 1040 Schedule C of Form 1065
Capital investments should match % ownership
Corporation Books/Taxes
Owner will be a salaried employee
Corporation is responsible for its own taxes, profits and losses
Capital infusion increases equity
Will Smith and Jack Jones are general partners (50% share each) in Ajax Pharmacy that exists in Corsicana, Texas. Texas is an entity state. For 2013, the business generated $300,000 of net profit (profit after all expenses). Will’s share of the profit that he reports on his personal income tax (Form 1040) is __________?
$150,000
Define Accounting
Service activity which functions to provide quantitative info about business activities in the form of accounting statements
- Useful in business decisions
Define Chart of Accounts
“Blueprint”
List of all accounts to be used by the business sub-divided by section
Define Journal
Book of original entry and it contains initial recording of transactions
Define General Ledger
Basic structure of the accounting system
Separate pages to capture the transactions for each account
Define Calendar year
If the accounting period is 12 consecutive months starting with January
Define fiscal year
If the accounting period is 12 consecutive months starting in any month other than January and does not start and end in the same year
Who uses fiscal years?
Corporation and partnerships
Define balance sheet
Primary financial statement showing the financial position for a business
**ASSETS =
Liabilities + Owner’s Equity
Define Double entry accounting
When posting transactions to the journal, we use double entry accounting which means that we will have equal debit and credit dollars for every transaction
Define assets
Economic resources owned by the business and are expressed as either current or non-current assets
Define Current Assets
Assets that will be sold, consumed or converted to cash within on operating cycle of the business
Current assets include:
Cash and cash equivalents Accounts receivable Inventory (merchandise/supplies) Short-term investment Prepaid expenses
Define Accounts Receivable
Amounts owed to the pharmacy by its customers
Define Merchandise Inventory
Consists of goods that the pharmacy has purchased for resale
Define Supplies inventory
Consists of goods that were purchased to be used in the business
Define prepaid expenses
Payment is made for a good or service in an accounting period prior to the one during which the good or service is actually used
Define Non-current assets
Assets that are not sold, consumer or converted to cash within the normal operating cycle of the business or one year
Purchases for use in the business
Examples of Non-current assets
Land Buildings Fixture Cars Computers
Define Liabilites
Amounts owed to persons or business other than the owners
Define Current Liabilities
Debts that will come during the current operating cycle of the business
- i.e.: accounts payable, credits, accrued expenses, tax liability, long-term debt
Define Non-current Liabilites
Debts that come after the current operating cycle of the business
- i.e.: car loans payable over five years, property mortgages
Define Owner’s Equity
Claims against the business by the owners
Increases through earnings (result of profitable operation)
ID the section of the balance sheet where you would find the following:
- Accounts Receivable:
- Accounts Payable:
- Prepaid expenses:
Current assets
Current liability
Current assets
Net Income =
Revenues (sales) - Expenses
Revenue increases owner’s equity
Expenses reduce owner’s equity
Define COGS
Cost of Good Sold
Reflective of purchases in the accounting period and beginning and ending inventories
Periodic system
