Chapter 1 Flashcards
Sole proprietorship
one owner- advantage easy to form, disadvantage- unlimited liability the owner is responsible for the companys debt
Partnership
two or more owners, disadvantage- unlimited liability the owners are responsible for the company’s debt
Corporation
sell shares of stock to investors owners are called stockholders, advantage- limited liability, continuity of life/ease in transfer of ownership, opportunity to raise large capital through stock, disadvantage- double taxation
what is accounting?
to identify, measure (in $) and communicate information about a company that is useful in making economic decisions
External user group
stockholders (owners of company), creditors (bank, people we owe $), competitors, government agencies (IRS, SEC),
Internal user groups
MGMT, CEO, CFO (all budgeting and planning)
Liabilities
debt (Accounts payable, notes payable)
Equity
Ownership (Common stock, retained earnings)
Assets
Cash, accounts receivable, Inventory, land, equipment, Furniture and fixtures, buildings
Balance sheet
Includes liabilities, equity, assets, shows the financial position of a company at a “point” in time
Income statement
includes revenue and expenses, revenue - expenses = Net Income/loss
Order to prepare the statements
- Income Statement
- Retained Earnings Statement
- Balance Sheet
- Statement of Cash Flows
The accounting equation
assets = Liabilities + Owners equity
Statement of Cash Flows
shows sources and uses of cash
1. Operating
2. Investing
3. Financing
Operating revenues
increase in assets or a decrease in liabilities as a result of delivering the product or performing a service
Operating expenses
decrease in assets or increase in liabilities from ongoing operations to generate revenue
Non operating gains or losses
increase in gains or decreases losses in assets as a result of an incidental transaction
Non operating
interest revenue or interest expense
Gross profit
Sales Revenue- COGS = Gross profit
Retained earnings equation
(when no changes in a company’s stock during the period)
Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings
Statement of Stockholders Equity
Beginning Retained Earnings + New Stock + Net Income - Dividends = Ending SHE
Assets in order of Liquidity
- Cash
- Marketable Security
- Accounts Receivable
- Inventory
- Supplies
- Pre Paid Expenses
Marketable security
short term investment, investment in stocks and bonds of other companies that management plans to sell within 12 months
Accounts Receivable
customer owes for products delivered or services provided
Inventory
Goods held for resale
Supplies
on hand supplies
Pre Paid expenses
payment made by the company in advance for items such as rent, insurance, advertising
PP&E
plant, property,& equipment fixed assets acquired for use in business rather than resale to customers
Does NOT have a limited useful life
land
HAS a limited useful life, depreciate
buildings, equipment, furniture and fixtures, vehicles, accumulated depreciation (contra asset)
Intangible Assets
Patents, Copyright, Trademark/Tradename, Franchise/Licenses, Goodwill
Order or current Liabilities in order of maturity
- accounts payable
- wages payable
- unearned revenue
- note payable
Long Term Liability
- Note Payable- Long term
- Bond Payable
- Mortgage Payable
Stockholders Equity
Common Stock + Retained Earnings
Working Capital
Current Assets - Current Liabilities
Current Ratio
Current Assets/ Current Liabilites
Gross Profit Ratio
Gross Profit/ Sales Revenue
Profit Ratio
Net Income/ Sales Revenue
GAAP- Generally Accepted Accounting Responsibilities
A common set of “rules” used to report US financial statements, very rule bases
Financial Accounting Standards Board
(FASB) private sector body given responsibility to develop GAAP, for US companies
IASB- International Accounting Standards Board
for non US companies, working towards a convergence of international financial reporting standards, very principle based, still has not been implemented been in the works since 03
Public Company accounting Oversight Board
five member body that sets auditing standards
Managements Responsibility
ultimate responsibility for the accuracy of the financial statement
Purpose of an Audit
prepare a report to state an opinion on the fairness of the financial statement
Sarbanes Oxley Act (SOX) of 02
sponsored by Senator Paul Sarbanes of Maryland and Congressmen Michael Oxley of Ohio, key provisions were Management, Board of Directors, External Auditors, and enforcement
