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Finance Exam 1 > Basic Business and Accounting > Flashcards

Basic Business and Accounting Flashcards

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1
Q

Define Business Ethics

A

The principles and standards that define acceptable conduct in business

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2
Q

Define Social responsibility

A

A businesses obligation to maximize its positive impact and minimize its negative impact on society

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3
Q

Define Ethical Issue

A

An identifiable problem or situation that requires that a person choose from several actions that may be evaluated as ethically right or wrong

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4
Q

Define loyalty

A

Employer and employee are mutually loyal to each other

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5
Q

Define veracity

A

Business is conducted in a truthful manner

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6
Q

Define Defined Benefit Pension

A

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”

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7
Q

Define Defined-contribution programs

A

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

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8
Q

Veracity was replaced with

A

Profits at all costs

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9
Q

Most common ethical problems?

A

Lying
Withholding vital information that could impact a management decision
Abusive/intimidating behavior

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10
Q

Four Categories of ethical issues?

A

Conflict of interest
Decision maker fairness and honesty
Deceptive communications
Deceptive business relationships

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11
Q

Define conflict of interest

A

problem occur when a person has to choose whether to advance their own personal interest or those of others

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12
Q

Define Deceptive communication

A

False or misleading advertising or personnel using deceptive selling techniques eventually anger customers (loss of money)

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13
Q

Define Deceptive business relationship

A

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

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14
Q

Ethical or Unethical choice in business =

A

Individual employee standards and values +
Managers and coworkers influences +
Ethical codes and compliance requirements

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15
Q

4 dimensions of the nature of social responsibility

A

An economic dimension
A legal dimension
An ethical dimension
A voluntary and philanthropic dimension

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16
Q

Sarbanes-Oxley Act

A

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

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17
Q

Define Generally Accepted Accounting Principles

A

Rules created so that the same set of procedures are used each time to report transactions and create financial statements

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18
Q

Define Business Entity Concept

A

Business is treated separately from owner’s personal financials

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19
Q

Define Cost Principle

A

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

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20
Q

Define Continuing Concern Concept

A

Business is established to remain operating using its assets to contiue operation

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21
Q

Define Objectivity principle

A

Amounts used in recording transactions must be supported by objective evidence such as invoices

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22
Q

Define Stable dollar concept

A

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

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23
Q

Define Conservatism

A

Requires that sufficient attention be given to risks taken by the organization and anticipate possible financial losses

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24
Q

Define Matching

A

Attempt to put expenses into the same accounting period as the revenues that caused the expenses to be generated

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25
Q

**Define Accrual Basis

A

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

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26
Q

**Define Cash Basis

A

Revenue is reported on the financial statement when it is actually RECEIVED
- Used when business do not know what they will be getting paid

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27
Q

Define Sole Propietorship

A

One owner
Has to transfer funds or create more net income to increase equity
No legal status and doesn’t exist legally

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28
Q

How do you end a sole proprietorship?

A

Pay off any debts and end it

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29
Q

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?

A

No

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30
Q

Advantages to Sole Proprietorship?

A

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

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31
Q

Disadvantages to Sole Proprietorship?

A

Unlimited personal liability

Ability to acquire a start-up and on-going capital is limited

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32
Q

Define Common Law

A

Body of law developed by custom or judicial decision sin US courts

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33
Q

Define Statutory law

A

Body of that develops from legislatures enacting new statutes
Local ordinances

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34
Q

Define Federal law

A

Apply to all states whereas state statutes only apply within the state’s borders

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35
Q

Define Uniform law

A

National Conference of Commissioners on Uniform State Laws draft model laws for the states to adopt

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36
Q

Define Uniform Partnership Act

A

Adopted by all states except one and is a model to use whenever two or more individuals wish to establish a partnership

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37
Q

**Define General Partnership

A

Governed by common law and statutory law
Voluntary agreement between an “aggregate of people:
Formed by a lawyer
NO LEGAL STANDING

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38
Q

Define Agency

A

Relationship between two parties in which one party (agent) agrees to represent or act for the other party (principal)

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39
Q

Define Partnership via the UPA

A

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

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40
Q

Define Aggregate Theory

A

Property and other assets held by individuals

Lawsuits brought against partners NOT business

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41
Q

Define Entity Theory

A

Business name can enter into agreements

Assets owned by the business- not affected if a partner leaves

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42
Q

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?

A

YES

43
Q

If Will and Jack do not want to follow the UPA, can they create their own agreement and what is it called?

A

Yes; Articles of Partnership

44
Q

Define Articles of Partnership and where is it submitted

A

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

45
Q

In Texas, each partner is required to do what?

A

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

46
Q

How can a partnership dissolve?

A

Death, bankruptcy or the inability of a partner to fulfill the stated obligations of the contract unless the partnership aggreement makes specific contigency provisions

47
Q

Advantages of partnership

A

Larger potential pool of capital and specialization

Partners contorl their own business activities

48
Q

Disadvantages of partnerships

A 
Unlimited liability (personal property)
Agency (one poor partner can do a lot of damage)
49
Q

Define Hybrid Forms of Partnerships

A

Limited Liability Partnerships

50
Q

Who typically uses LLP?

A

Attorney’s/physicians/accountants OR by family business

51
Q

What do you have to do to get an LLP legit?

A

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

52
Q

Define LLP

A

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

53
Q

Define FLLP

A

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

54
Q

Define LP

A

Limited Partnership
Oldest
One general partner + one limited partner
General partner: management responsibility and assumes all debts
Limited partner: contributes case or property,

55
Q

How do you make an LP?

A

File with the SofS and must include “LP” in name

56
Q

Define LLLP

A

Limited Liability Limited Partnership

Limit all partner liability to the amount of their investments in the business

57
Q

Define Corporation

A

Association of 2 or 3 + individuals CHARTERED under the laws of the state to conduct business as an entity, separate from its “owner”

58
Q

Define Chartered

A

It is the Articles of Incorporation and is a document htat must be filed with the SofS

59
Q

Okay so we are chartered, now what?

A

They must elect a Board of Directors and adopt bylaws to govern how the organization will be run.

60
Q

What does the Board do?

A

Appoint officers to carry out the wishes and direction of the Board and manage the day-to-day activities of the business

61
Q

So what about the people who OWN the business?

A

They are shareholders not Board members

62
Q

Business corporations are divided into what?

A

C and S

63
Q

All C corporations must include?

A

The term Corporation, Incorporated, Company or Inc in their name

64
Q

Advantages of a C Corporation

A

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

65
Q

Disadvantages of C Corporation

A

Double taxation

66
Q

Define Double taxation

A

Corporation will be taxed at high corporate rate for earnings and then individual shareholders are taxed as ordinary income from earnings on stock

67
Q

Define S Corporation

A

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

68
Q

Define LLC

A

Limited Liabilities Companies

Tax treatment of a partnership with limited liability advantages of a corporation

69
Q

LLC is not a partnership nor a corporation? What makes it different?

A

NO shares, it has interest certificates
No shareholders, it has members
Has an operating agreement
Member’s liability is limited to their investment

70
Q

Advantage of LLC

A

Profits are passed through the members and do not reside with the company

71
Q

Disadvantages of LLC

A 
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
72
Q

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?

A

Yes

73
Q

Define Merchandising Firm

A

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)

74
Q

Define Service Firm

A

Pharmacists provides “services” rather than a commodity

Administrative/operating expenses need to be allocated if “service role” is done in the pharmacy

75
Q

Sole Proprietorship Book/Taxes

A

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

76
Q

Partnership Books/Taxes

A

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

77
Q

Corporation Books/Taxes

A

Owner will be a salaried employee
Corporation is responsible for its own taxes, profits and losses
Capital infusion increases equity

78
Q

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 __________?

A

$150,000

79
Q

Define Accounting

A

Service activity which functions to provide quantitative info about business activities in the form of accounting statements
- Useful in business decisions

80
Q

Define Chart of Accounts

A

“Blueprint”

List of all accounts to be used by the business sub-divided by section

81
Q

Define Journal

A

Book of original entry and it contains initial recording of transactions

82
Q

Define General Ledger

A

Basic structure of the accounting system

Separate pages to capture the transactions for each account

83
Q

Define Calendar year

A

If the accounting period is 12 consecutive months starting with January

84
Q

Define fiscal year

A

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

85
Q

Who uses fiscal years?

A

Corporation and partnerships

86
Q

Define balance sheet

A

Primary financial statement showing the financial position for a business

87
Q

**ASSETS =

A

Liabilities + Owner’s Equity

88
Q

Define Double entry accounting

A

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

89
Q

Define assets

A

Economic resources owned by the business and are expressed as either current or non-current assets

90
Q

Define Current Assets

A

Assets that will be sold, consumed or converted to cash within on operating cycle of the business

91
Q

Current assets include:

A 
Cash and cash equivalents
Accounts receivable
Inventory (merchandise/supplies)
Short-term investment
Prepaid expenses
92
Q

Define Accounts Receivable

A

Amounts owed to the pharmacy by its customers

93
Q

Define Merchandise Inventory

A

Consists of goods that the pharmacy has purchased for resale

94
Q

Define Supplies inventory

A

Consists of goods that were purchased to be used in the business

95
Q

Define prepaid expenses

A

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

96
Q

Define Non-current assets

A

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

97
Q

Examples of Non-current assets

A 
Land
Buildings
Fixture
Cars
Computers
98
Q

Define Liabilites

A

Amounts owed to persons or business other than the owners

99
Q

Define Current Liabilities

A

Debts that will come during the current operating cycle of the business
- i.e.: accounts payable, credits, accrued expenses, tax liability, long-term debt

100
Q

Define Non-current Liabilites

A

Debts that come after the current operating cycle of the business
- i.e.: car loans payable over five years, property mortgages

101
Q

Define Owner’s Equity

A

Claims against the business by the owners

Increases through earnings (result of profitable operation)

102
Q

ID the section of the balance sheet where you would find the following:

  • Accounts Receivable:
  • Accounts Payable:
  • Prepaid expenses:
A

Current assets
Current liability
Current assets

103
Q

Net Income =

A

Revenues (sales) - Expenses
Revenue increases owner’s equity
Expenses reduce owner’s equity

104
Q

Define COGS

A

Cost of Good Sold
Reflective of purchases in the accounting period and beginning and ending inventories
Periodic system

Finance Exam 1 (4 decks)

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