Ch 1 - A Framework for Financial Accounting Flashcards
Describe investors.
Investors want to make good decisions related to buying and selling company’s stock (shares of ownership).
Describe the two primary functions of financial accounting.
Measure the business activities of the company and communicate those measurements to external parties for decision-making purposes.
Describe creditors.
Creditors make decisions related to lending money to the company.
Define corporation and limited liability. What about taxes?
A corporation is a company that is legally separate from its owners. The advantage of this legal separation is limited liability for stockholders. Stockholders will not lose any personal assets if the company loses too much or fails.
But, the company is taxed separately from the owners, so the owners pay tax twice. Double taxation.
Define sole proprietorship. What about taxes?
A business owned by one person. The business’s income is included in the person’s personal income and thus taxed only once. But, liability is an issue.
Define partnership.
A business owned by two or more persons. Liability is a risk.
Define operating activities.
Transactions related to the primary operations of the company, i.e. Providing products and services to customers, plus the costs of doing so like utilities, taxes, advertising, salaries, and rent. Calculated first for statement of cash flows.
Selling Advertising Utilities Rent Taxes Salaries
Define investing activities.
Calculated second for statement of cash flows.
Transactions involving the purchase and sale of resources that provide long-term benefit to the company (eg years).
Equipment
Supplies
Building
Define financing activities.
Calculated last for the statement of cash flows.
Transactions the company has with investors and creditors.
Issuing stock
Loan from bank
Define assets.
Company’s resources.
Cash Equipment Supplies Building Inventory Land Accounts receivable
Define liabilities.
Amounts owed to creditors.
Bank loan
Accounts payable.
Notes payable (has interest)
Define stockholders’ equity
Owners’ claims to resources. Stockholders are the owners. They claim any resources not owed to creditors.
What is the basic accounting equation?
Assets = Liabilities + Stockholders’ Equity
Also:
Assets - Liabilities = Stockholders’ Equity
The accounting eq illustrates a fundamental model of business valuation.
Define revenues.
Amounts earned from selling products or services to customers.
Define expenses.
The costs of providing products and services.
Salaries Rent Supplies Utilities Research and Development (R&D)
Define net income.
Net Income = Revenues - Expenses
Note: not the same as profit.
Conversely, net loss occurs when expenses exceed revenues.
Define dividends.
Cash payments to stockholders. Comes out of net income.
Dividends are not considered to be expenses.
What are the four primary financial statements.
- Income Statement
- Statement of Stockholders’ Equity
- Balance Sheet
- Statement of Cash Flows
Describe the statement of stockholders’ equity.
A financial statement that summarizes the changes in stockholders equity over an interval of time.
Stockholders’ equity consists of common stock and retained earnings.
Define retained earnings.
Net income - dividends.
It is an internal source of stockholders’ equity.
Describe balance sheet
Financial statement that pr dents the financial position of the company on a particularly date.
Assets = Liabilities + Stockholders’ Equity
Describe statement of cash flows
Financial statement that measures activities involving cash receipts and cash payments over an interval of time. There are 3 categories: operating, investing, and financing.
Define the management discussion and analysis (MD&A) section.
Another source of info in addition the the financial statements. Typically includes management’s views on significant events, trends, and uncertainties pertaining to the company’s operations and resources.
Define note disclosures
These offer additional info either to explain the information presented in the financial statements or to provide info not included in the financial statements.
Eg. Report total revenues by geographic region.
