Chapter 1 Flashcards
Identify the Users of Accounting Information
Internal Users: has access to accounting information. Ex: managers, directors, employees and other functional areas within a company.
External Users: not involved in managing a company and do not have access to accounting information, other than what is available to the general public. ex: investors (shareholders) and creditors (lenders)
Forms of Business Organization
Proprietorship, Partnership & Corporation
Business Organization: Proprietorship
Proprietorship: A business owned by one person. This is simple to set up and gives the owner complete control over the business. Although this business has limited life (death of owner can lead to death of business) and unlimited liability (full legal responsibility and debt is on the owner, can be sued for personal assets like house, car, and dog)
Business Organization: Partnership
Partnership: Owned by more than one person and formalized through a written agreement. the income tax is paid by the individual partners. The more owners involved the greater the capital as wealth in the form of money or other assets owned by a person or organization are available or contributed for a particular purpose such as starting a company or investing. Although partners will undertake all business debt (one gets sued the other will too) they have unlimited liability. shared decisions are difficult. Partners are taxed on their share of profits.
Business Organization: Corporation
Corporation: Separate legal entity owned by shareholders. There are two kinds: public (shares are traded on exchange and private (not available to general public). Indefinite life, easier to generate capital, owners are taxed on distributed profits, limited liability. Although if majority of shares are sold the owners can lose control over business.
Types of Business Activities
Operating: day to day activities of the business. Revenue and Expenses. Related accounts (A/R & A/P)
Investing: Purchases and sales on long-lives assets needed for operations. (PPE). Tangible, intangible, and investments.
Financing: Obtaining and repaying funds to finance business operations. Equity financing, profits made can be shared with shareholders or kept within the business to expand. You can also use profits to buy more shares and take ownership of more of the business
What is Accounting
Accounting identifies and records the economic events of an organization and communicates to users to inform judgements and decisions.
Types of Financial Statements
Statement of Income
-reports revenues and expenses for a specific period of time
Statement of Changes in Equity
-reports changes in the shareholders equity during a specific period of time
Statement of Financial Position
-Shows assets, liabilities, and shareholders equity for a specific period of time
Statement of Cash Flows
-shows how a company obtained and used cash for an accounting period
Statement of Income equation
Revenues-Expenses=Net income or loss
Statement of Changes in Equity components
Share Capital: common or preferred shares
Retained Earnings: cumulative net income in company LESS any dividends paid to shareholders
Changes in Common Shares equation
Common shares beginning of period + common shares sold - common shares repurchased = common shares end of period
Changes in Retained Earnings equation
RE beginning of period + net income or loss - dividends declared = RE end of period
Statement of changes in equity equation
Retained Earnings + Common Shares = Total Equity
Statement of Financial Position equation
Assets = Liabilities + Shareholders Equity
Dividends Definition
regular payments of profits to investors who own the company stocks
