chapter 1 Flashcards
Sole proprietorship
A business owned by one person
simple to set up and gives control
more favorable tax treatment
More liability
Partnership
A business owned by two or more persons
Simple to establish
Broader skills and resources
Tax advantages
More liability
Corporation
A business organized as a seperate legal entity owned by stockholders
Easier to transfer ownership
Easier to raise funds
No personal liability
Accounting
The information system that identifies, records, and communicates the economic events to interested users
Internal users
Managers who plan, organize, and run a business
ex. marketing manager, production supervisor, comapny officer, finance director
External users
Investors
Creditors
Taxing authorities
Customers
Labor unions
Regulatory agencies
Investors
use accounting info to make decisions about stocks
Creditors
use accounting info to evalulate the risks of selling on credit or lending money
Taxing authorities
want to know whether a comapny is following tax laws
creditors
people to whom money is owed
Bonds payable
Debt securities sold to investors that must be repaid at a particular date some years in the future
Liablities
Amounts owed to creditors-in the form of debt and other obligations
common stock
the total amount paid in by stockholders for the shares they purchase
Dividends
Payments to stockholders
assets
Resources owned by a business
Revenue
The increase in assets resulting from the sale of a product or service
Inventory
Goods available for future sales to customers
Account receivable
The right to receive money in the future
Expenses
The cost of assets consumed or services used in the process of generating revenues
Net income
When revenue exceeds expenses
Net loss
When expenses exceed revenues
income statement
Reports the success or failure of the company’s operations for a period of time
Retaind earnings
The net income retained in the corporation
Retained earnings statement
Shows the amounts and causes of changes in retained earnings during the period
Balance sheet
Reports assets and claims to assets at a specific point in time
Stockholders’ equity
Claims of owners
Basic accounting equation
assets = liabilities + stockholders’ equity
statement of cash flows
provides financial information about the cash receipts and cash payments of a business for a specific period of time
Anual report
Provided by shareholders by publicly traded companies including financial statements
Management discussion and analysis (MD&A)
Covers the companies ability to pay near-term obligations, its ability to fund operations and expansion, and its results of operations
Notes to the financial statements
Clarify the financial statements and provide additional detail
Auditor’s report
States the auditor’s opinion as to the fairness of the presentation of the financial position of the company
auditor
an accounting professional who conducts an independent examination of a compnay’s financial institutions
unqualified opinion
If the auditor is satisfied that the financial statements provide a fair representation of the company’s financial position and is accepted in accounting principles
Certified Public Accountant
An individual who has met certain criteria and is thus allowed to perform audits of corporations
Sarbanes-Oxley Act
Regulations passed by Congress in 2002 to try to reduce unethical corporate behavior
