Chapter 1 Flashcards
Sole proprietorship
Owned by one person
Tax advantages
Simple to set ip
Higher liability
Partnership
Two or more people associated as partners
Tax advantages often formed to increase economic resources
Partners bring unique skills and resources
Shared controls
Tax advantages
Still pretty high liability
Corporation
Organized as a separate legal entity
Owned by stockholders who receive share to indicate ownership
Buying stock is often more attractive because shares of stock are easy to sell
Can become a stockholder by investing relatively small amounts of $
Therefore easier to raise funds
Higher taxes
No personal legal liability
Hybrids
LLC or Sub Chapters
Combine tax advantages w/ limited liabilities
Purpose of financial info
To provide inputs for decision making
Accounting
The info system that identifies records and communicates the economic events of an org to interested users
Internal users
Managers who plan, organize, and run a business
External users
Investors use accounting info to make decisions to buy, hold, or sell stock
Creditors use acct info to evaluate the risks of selling on credit or lending money
Others:
Tax authorities
Customers
Labor unions
Regulatory agencies
Financing activities
Creditors Liabilities Common stock Dividends Selling your stock
Creditors
Persons or entities to whom a corp owes money
Liabilities
Amounts owed to creditors in the form of debt and other obligations
Common stock
Term used to describe the total amount paid by stockholders for the shares they purchase
Dividends
Payments to stockholders (regular)
Investing activities
Purchase of resources needed to operate
Asssets
Assets
Resources owned by a business
Cash
Fixed assets: property, plant, equipment
Operating activities
Revenues and expenses
Revenues
Amounts earned on sold products
Revenue
The increase in assets or decrease in liabilities resulting for the sale of goods
Account receivable
Right to recieve money in the future
Interest expense
Amounts of interest paid on various debts
Accounts payable
Obligations to pay for goods purchased on credit from suppliers
Income statement
Used to show how successfully your business performed in a given period of time
Retained earnings statement
Shows how much of previous income was distributed to stockholders as dividends and how much was retained in the business to allow for future growth
Balance sheets
Present a picture at a point in time of what your business owns and owes
Statement of cash flows
Shows where your business obtained cash during a period of time and how that cash was used
order of financial statements
1) income statement
2) retained earnings statement
3) balance sheet
4) statement of cash flows
what does each statement get from the other
1) net income from income statement goes on retained earnings statement
2) retained earnings from RE statement goes on balance sheet
3) cash on balance sheet goes as cash at the end of the period on statement of cash flows
what does the management discussion portion of the annual report include?
1) ability to pay near term obligations
2) ability to fund operations and expansion
3) its results of operations
4) several subjective estimates/opinions are involved`
what do the notes to financial statements include?
1) clarify the fin. statements/provide additional detail
2) descriptions of accting policies and methods utilized to prepare statements
what is included in the independent auditor’s report?
1) states auditor’s opinion as to the fairness of the presentation of the financial positions/conformance with GAAP
2) unqualified opinion-satisfied that the statements provide fair representation of th ecos financial position and results of operations are in accordance w/ GAAP
