Chapter 1 Flashcards
What are the 2 types of users of financial information?
Internal and External Users
What are Internal Users?
Internal users of accounting information plan, organize and run companies, essentially they are all employees who work for the organizationInternal users include… Finance directors Marketing managers Human Resource External Users
What are the types of External Users and how do they use financial information?
Investors: Use accounting information to make decisions to buy, hold or sell their investment
Lenders: Use accounting information to evaluate the risks of lending money
Creditors: Use accounting information to decide whether or not to grant credit
What are the 3 types of business organization?
Sole Proprietorships (single owner, unlimited liability), Partnerships (multiple owners, unlimited liability) and corporations (many owners, limited liability)
What is a Sole Proprietorship?
A sole proprietorship is a business owned by one person where there is no legal distinction between the business as an economic unit and the owner
The business profits are reported as self-employment income and taxed on the owner’s personal income tax return. For accounting purposes, the business records of the proprietorship must be kept separate from those related to the owner’s personal activities
What is a Partnership?
A partnership is a business owned by multiple people where there is no legal distinction between the business as an economic unit and the owner
Partnerships are normally formalized in a written partnership agreement that outlines the formation of the partnership, contributions, how profits and losses are shared, provisions for withdrawals of assets, dispute resolution and partnership liquidation
What is a Corporation?
A corporation is a business organized as a separate legal entity which is owned by shareholders
Since a corporation is a separate legal entity, its life is indefinite, which means it continues on regardless of who owns its shares. Buying shares in a corporation, is often a more attractive investment than starting up a partnership or proprietorship
Define Generally Accepted Accounting Principles (GAAP)
GAAP provides businesses with the rules, standards, principles and format for which they must disclose their financial information
GAAP can differ depending on the form of business organization
What GAAP is generally used for publicly traded corporations?
Publically traded corporations must use International Financial Reporting Standards (IFRS)
What GAAP is generally used for privately traded corporations?
Privately held corporations have a choice to use IFRS or Accounting Standards for Private Enterprises (ASPE)
Most private corporations choose to follow ASPE for simplicities sake
What are the 3 business activities?
Financing
Investing
Operating
define and explain the differences between the 2 types of financing.
Debt financing
- company must pay back all borrowed funds plus interest.
- Company maintains all ownership
Equity Financing
- company does not need to pay back borrowed funds
- company gives up partial ownership
Define Investing Activities
the purchase or sale of long term assets (i.e. land, furniture, buildings, equipment) that a company needs in order to operate the business
Define Operating Activities
The day to day operation of the business. Earning revenues and incurring expenses.
What is the purpose of accounting?
To communicate the financial health of companies to both internal and external users.
What are the 4 main financial statements?
balance sheet, income statement, statement of changes in equity, statement of cash flows
What does an income statement do?
reports a company’s financial performance over a specific accounting period. Unearned revenue and prepaid things not on income statement
What does a statement of changes in equity do?
it shows changes in the total interest in a company (shareholders’ equity).
What are the relationships between all of the statements?
Profit from income statement is reported in statement of changes in equity
Ending balances of each shareholders’ equity account is reported in both balance sheet and changes in equity
Statement of cash flows is related to the balance sheet
What is the accounting equation?
Assets = Liabilities + Shareholders Equity
What is a Balance Sheet?
a statement of the assets, liabilities, and capital of a business or other organization at a particular point in time, detailing the balance of income and expenditure over the preceding period. Current assets listed in order of liquidity (cash, accounts receivable, inventory)
What does a statement of cashflows do?
provides information about the cash receipts and cash payments of a business for a specific period of time
