Chapter 1 Flashcards
Balance sheet definition
A financial statement that reports the assets
and claims to those assets at a specific point in time
Basic accounting equation
Assets = Liabilities + Stockholders’ Equity
Certified Public Accountant (CPA)
An individual who has met certain criteria and is thus allowed to perform audits of corporations
Common Stock definition
Term used to describe the total amount paid
in by stockholders for the shares they purchase
Corporation definition
A business organized as a separate legal
entity owned by stockholders. (
Dividends definition
Payments of cash from a corporation to its
stockholders.
Expenses definition
The cost of assets consumed or services used in
the process of generating revenues
Income statement definition
A financial statement that reports
a company’s revenues and expenses and resulting net
income or net loss for a specific period of time
Liabilities definition
Amounts owed to creditors in the form of debts
and other obligations.
Management discussion and analysis (MD&A) definition
A section of the annual report that presents management’s views
on the company’s ability to pay near-term obligations,
its ability to fund operations and expansion, and its
results of operations
Net Income definition
The amount by which revenues exceed expenses.
Net loss definition
The amount by which expenses exceed revenues.
Notes to the Financial Statement definition
Notes clarify information presented in the financial statements and provide
additional detail.
Partnership definition
A business owned by two or more persons associated as partners. (
Retained Earnings definition
The amount of net income retained in
the corporation.
Retained Earnings Statement definition
A financial statement that
summarizes the amounts and causes of changes
in retained earnings for a specific time period.
Revenue definition
The increase in assets or decrease in liabilities
resulting from the sale of goods or the performance of
services in the normal course of business
Sarbanes-Oxley Act (SOX) definition
Regulations passed by Congress
to reduce unethical corporate behavior.
Sole proprietorship definition
A business owned by one person
Statement of Cash Flows definition
A financial statement that provides
financial information about the cash receipts and cash
payments of a business for a specific period of time.
Stockholder’s Equity definition
The owners’ claim to assets
Auditor’s Report definition
A report prepared by an independent
outside auditor stating the auditor’s opinion as to the
fairness of the presentation of the financial position and
results of operations and their conformance with generally accepted accounting principles.
Assets definition
Resources owned by a business.
Annual Report definition
A report prepared by corporate management
that presents financial information including financial
statements, a management discussion and analysis section,
notes, and an independent auditor’s report.
Accounting definition
The information system that identifies, records,
and communicates the economic events of an organization to interested users.
Example of sole proprietorship types of businesses
barber shops, law offices, and auto repair shops are
often sole proprietorships, as are farms and small retail stores.
Example of partnership types of businesses
Retail and service-type businesses, including professional
practices (lawyers, doctors, architects, and certified public accountants)
All benefits of a Sole Proprietorship
- Simple to establish
- Owner-controlled
- Tax benefits
All benefits of a partnership
- Simple to establish
- Shared control
- Tax benefits
- Broader skills and resources
All benefits of a corporation
- No personal liability
- Easier to raise funds
- Easier to transfer ownership
Goal of hybrid business organization
combine the tax advantages of partnerships
with the limited liability of corporations
Examples of Hybrid Business Organizations
S corporations and Limited Liability Corporations (LLCs)
Corporations outnumber partnerships and sole proprietorships by what factor?
5x
Types of users of financial information
- Internal
2. External
Example of Internal users
finance directors, marketing managers, human
resource directors, and company officers
Internal users definition
managers who plan, organize, and
run a business
Example of external users
- Investors
- Creditors
- Labor Unions
- Customers
- Regulatory Agencies
- Taxing Authorities
Year SOX was passed
2002
What type of companies does SOX apply to?
Publicly traded companies
What does SOX do?
- Require a system of internal controls
- Corporate executives and boards of directors must certify and enforce the controls
- Independent outside auditors attest to the internal controls
- Created the Public Company Accounting Oversight Board (P C A O B)
What are the 3 steps in resolving an ethical dilemma?
- Recognize an ethical situation and the ethical issues involved.
- Identify and analyze the principal elements in the situation.
- Identify the alternatives, and weigh the impact of each alternative on various stakeholders.
Which business type(s) is easier to raise funds?
Corporation
Which business type(s) is easy to establish?
Sole proprietorship and partnership
Which business type(s) have no personal legal liability?
Corporations
Which business type(s) provide tax advantages?
Sole proprietorship and partnership
Which business type(s) are easier to transfer ownership?
Corporations
Which business types(s) are owner-controlled?
Sole Proprietorship
Which business type(s) allow for shared control?
Partnerships
Which business type(s) harness broader skills and resources?
Partnerships
Security and Exchange Act filing requirements
- Form 10-K
- Form 10-Q
- SEC form 10
How often is a SEC form 10-k filed?
Annually
How often is a SEC form 10-Q filed?
Quarterly
When is a company required to file a SEC Form 10?
If they have over $10 million in total assets or over 750 shareholders
Benefits of Disclosure
- Lower costs of funds and labor
2. Economic benefits from reliable disclosures
Costs of disclosure
- Preparation and dissemination
- Competitive disadvantages
- Litigation potential
- Political costs
Which of the following did not result from the Sarbanes-Oxley Act?
a. Top management must now certify the accuracy of financial information.
b. Penalties for fraudulent activity increased.
c. Independence of auditors increased.
d. Tax rates on corporations increased.
D. - Tax rates did NOT increase for corporations
3 Principal Types of Business Activity
- Investing
- Financing
- Operating
Accounting Information System definition
Keeps track of the various business activities- financing, investing, and operating
2 Primary Source of Funds for Financing
- Borrowing money (debt financing)
2. Issuing/selling shares of stock in exchange for cash (equity financing)
Creditors definition
Party to whom debt amounts are owed
Examples of liabilities
Notes payable
Bonds payable
________ payable
Treasury stock definition
Term used to describe the amount paid by the company to buy back shares from the stockholders.
True of False: In the event of bankruptcy creditor claims must be paid BEFORE stockholder claims.
True
What are the 3 types of business activity?
- Financing
2. Investing
What is another name for Property, Plant and Equipment
Fixed assets
Examples of assets
- Property, plants, and equipment (fixed assets)
- Cash
- Investments (securities)
What is another name for investments?
Securities
Define “Investing Activities”
Purchase (or sale) of long-lived resources a company needs to operate.
Define “Operating Activities”
The use of company resources to produce, promote, and sell its products and services.
“Operating” Assets
- Supplies
- Inventory
- Accounts receivable
Supplies definition
Assets used in day-to-day operations (rather than sold to customers).
Inventory definition
Goods available for sale to customers.
Accounts receivable definition
Right to receive money from a customer as the result of a sale.
What are the 3 most common types of revenue?
- Sales revenue
- Service revenue
- Interest revenue
Name 6 of the most common expenses?
- Cost of goods sold
- Selling expenses
- Marketing expenses
- Administrative expenses
- Interest expense
- Income tax expense
Accounts Payable definition
The obligation to pay for goods purchased on credit from suppliers
What word indicates liabilities arising from expenses?
Payable
Issuing debt comes from _____
Investors
Issuing equity comes from ______
Owners
What are the two types of capital stock?
- Common Stock
2. Preferred Stock
Which type of capital stock has voting rights?
Common stock
What is treasury stock?
Term used to describe the amount paid by the company to buy back shares from the stockholders
What are the four financial statements?
- Income statement
- Retained earnings statement
- Statement of cash flows
- Balance sheet
What is another name for the balance sheet
The fundamental equation
What does GAAP stand for?
Generally Accepted Accounting Principles
Which financial statement helps users determine if the company’s operations are profitable?
Income Statement
Why are financial statement users interested in net income?
- Investors are interested in a company’s past net income because it provides useful information about predicting future net income
- Creditors also use the income statement to predict future earnings
— Reporting a strong profit will make it easier for the company to raise additional cash either by issuing shares of stock or borrowing.
Which 3 reports are produced for the same time period?
Which 1 report differs? How?
Same:
- Income Statement
- Retained Earnings
- Statement of Cash Flows
Different:
1. Balance sheet, is as of one specific date
What is the format of the Retained Earnings Statement?
Previous retained earnings
+ Net Income
- Dividends
= Current retained earnings
What is the format of the Income Statement?
Revenues
- Expenses
= Net income/net loss
On the balance sheet, in what order are the assets listed?
In order of liquidity
What does liquidity mean?
How quickly an asset can be converted into cash
What is another word for liabilities?
Debt
What are the two types of claims to assets?
- Claims by creditors (liabilities)
2. Claims by owners (stockholder’s equity)
What is the format of the Balance Sheet?
Total Assets = Liabilities
+Stocks
+Retained earnings
**The equation MUST balance. Meaning assets = the sum of liabilities and stockholder equity
The balance sheet is used to
- determine the likelihood creditors will be repaid
- determine if cash on hand is sufficient for immediate needs
- evaluate the relationship between debt and SE
- does the company have a good debt and common stock ratio
What are the 4 components of the annual report
- Financial Statements
- Management Discussion and Analysis
- Notes to the financial statements
- An independent auditor’s report
In which report must management highlight favorable or unfavorable trends and identify significant events and uncertainties that affect these factors?
Management Discussion and Analysis (MD&A)
True/False: Information in the Notes to the Financial Statements must be quantifiable (numeric).
False
What are 3 types of Notes to Financial Statements?
- Descriptions of accounting policies and methods used in preparing the statements
- Explanations of uncertainties and contingencies
- Various statistics and details too voluminous to be included in the statements
Auditor definition
An accounting professional who conducts independent examinations of a company’s financial statements.
Unqualified Opinion
When an auditor is satisfied that the financial statements provide a fair representation of the company’s financial position and the results of operations in accordance with GAAP
True/False: With an qualified opinion, we have complete confidence that the financial statements give an accurate picture of the company’s financial results.
False
Which report is most closely associated with
- Descriptions of significant accounting policies?
Notes to the financial statement
Which report is most closely associated with
*Unqualified opinion
Auditor’s report
Which report is most closely associated with
*Explanations of uncertainties and contingencies
Notes to the financial statement
Which report is most closely associated with
*Description of ability to fund operations and expansion
MD&A
Which report is most closely associated with
*Description of results of operations
MD&A
Which report is most closely associated with
- CPA
Auditor’s Report
