Ch 1 Flashcards
Business entity
Organization operated to earn a profit
Business
All activities necessary to provide members of economic system
With goods and services
Sole proprietorship
Form of organization with single owner
Note: business’s profits are taxed on individual’s returns
Economic entity concept
Assumption that a single identifiable unit must be
accounted for in all situations
Ex. Owner must separate personal costs with costs associated with business
- financial statements must not overlap personal affairs
Partnership
Business owned by two or more individuals
Organization form often used by accounting and law firms
Note: individual partners pay taxes on their proportionate shares of business’s profits as partnership is not a taxable entity
Corporation
Form of entity organized under laws of particular state
Ownership evidenced by shares of stock
Share of stock
Certificate that acts as evidence of ownership of corporation
Primary advantage of running organization as corporation?
Ability to raise large amounts of money in relatively brief periods of time
Bonds
Certificate that represents corporations promise to repay certain amount of money with interest in future
Describe ease in transfer of ownership In corporation
Another advantage, where a stockholder can sell shares through his brokerage instantly
Stockholders face limited liability and
can only lose amount invested
Non business entity
Organization operated for some purpose other than to earn profits
Ex. Hospitals, municipal government, local school districts
Note: none of these entities have an identifiable owner
Businesses engage in which three types of activities?
Financing, investing and operating
Financing
Necessary to start a business
Funds are obtained from stockholders and creditors
Investment
Used for various assets needed to run a business
Business operations
May consist of providing goods or services or both
Liability
Obligation of a business
Ex. Notes payable, bonds payable, taxes payable
Liabilities are satisfied by transferring assets
Capital stock
Indicates owner’s contributions to a corporation
Someone who buys stock isn’t lending money to a business
Stockholder/shareholder
One of the owners of the corporation
Provides permanent form of financing to business
Creditor/Lender
Someone to whom a company or person has a debt
Doesn’t provide a permanent form of financing to the business
Asset
Future economic benefit
Revenue
Inflow of assets resulting from sale of goods and services
Expense
Outflow of assets resulting from sale if goods and services
Accounting
Process of identifying, measuring and communicating economic info to various users
List four examples of product companies
Suppliers, manufacturers, wholesalers, retailers
Management accounting
Branch of accounting used to provide
internal users (management) with info to facilitate
Planning and control
Financial accounting
Branch of accounting used for communication with outsiders/external users through financial statements
Who are internal users of financial statements?
Managers of company
External users of financial statements?
Stockholders, investors, creditors and government agencies
Accounting equation
Assets = liabilities + owner’s equity
Owners’ equity
Owner’s claims on assets of an entity
Stockholders’ equity
Owners’ equity of corporation
2 ways stockholders’ equity arises.
1 when company issues shares to investors
2 through retained earnings of a company
Retained earnings
The part of owners equity that represents
The income earned less dividends paid
Over life of an entity
Balance sheet (sometimes called the statement of financial position)
Financial statement that summarizes assets, liabilities and owners equity of company at specific point in time
Assets need to equal liabilities + owners equity
Income Statement AKA statement of income
Statement that summarizes revenues and expenses
Net income
Excess of revenues over expenses
Dividends
Distribution of net income of a business to its owners
Statement of retained earnings
Statement that summarizes income earned and dividends
Paid over the life of the business
Beginning balance. Xxx
Add net income for period. Xxx
Deduct dividends for period. Xxx
Ending balance. Xxx
Statement of cashflow
Financial statement that summarizes company’s cash receipts
And cash payments during period from operating, investing
And financing activities
Shows reader where company got cash during year
and how it used that cash
Economic entity concept
Requires that an identifiable, specific entity be the subject
Of a set of financial statements
Ex. Keep business separate from personal affairs
Cost Principle AKA Original cost/historical cost
Assets are recorded at cost to acquire them
Going concern
Assumption that entity is not in process of liquidation
And that it will continue indefinitely
Monetary unit
Yardstick used to measure amounts in financial statements
The dollar in the US
Note: financial statements are prepared under the assumption that monetary unit is relatively stable
Time period
Artificial segment on calendar used as basis for preparing financial statements
Generally Accepted Accounting Principles (GAAP)
Various methods, rules, practices and other procedures
That have evolved over time in response to need to regulate
Preparation of financial statements
Securities and Exchange Commission (SEC)
Federal agency with ultimate authority
To determine rules for preparing statements for
Publicly sold companies
Financial Accounting Standards Board (FASB)
Group in private sector with
Authority to set accounting standards
American Institute of Certified Public Accountants (AICPA)
Professional organization of certified public accountants
Certified Public Accountant (CPA)
Designation for an individual who has passed a uniform exam
Administered by the AICPA and has met other requirements
Determined in individual states
Public Company Accounting Oversight Board (PCAOB)
Five member body created by congress in 2002
Sets auditing standards
International Accounting Standards Board (IASB)
Organization formed to develop worldwide accounting standards
Auditing
Process of examining financial statements
and underlying records of company to
See if statements are fairly presented
Sarbanes Oxley Act passed by congress 2002
Brought reform to corporate accountability in face of
Many corporate scandles
1 established Public Company Accounting Oversight Board
2 requires external auditors to report directly to audit committee
3 prohibits other services from external auditors that create
conflict of interest
Explain the critical role that ethics plays in providing useful financial info
All decision makers must consider moral
and social implications of their decisions
Professional judgement is need when there are conflicts
To arrive at appropriate decisions In application of GAAP
