Chapter 1 Flashcards
3 basic activities accounting consists of
identities
records
communication
who are accounting information important for
positions with direct financial interest
positions with indirect financial interest
positions with direct financial interest
investors
creditors
employees
positions with indirect financial interest
tax authorities
regulatory agencies
economi planners
labor unions
what kind of company needs to report finances each quarter and ones a year
publicly health companies (stocks in hand of public)
what is the purpose of a business
provide a good or service to make profit
subdivisions of businesses
for-, or non-for-profit
classified by ownership
name of ones a year financial statement public companies need to turn to SEC
10K
subdivisions of service companies
service company - does something to consumer
finincial service companies - provide services related to money
subdivision of sales
merchandise - buy goods and resell it to other businesses or final customers
manufacturing - makes product and sells it to other businesses or final customers
3 different forms of organizations/businsses based on ownership
sole proprietorship
partnership
corporation
characterstics of a sole proprietorship
1 owner (responsible for entire business)
easy to create but hard to aquire
business´ and individuals tax returns are the same
no responsiblity for financial statments
characteristics of a partnership
2 or more owners
company´s income included in owner´s tax return
owners responsible for company´s action
amount of ownership depends on amount of investment
easy to raise capital
characteristics of a corporation
multiple owners (stakeholders)
many regulations - controlled ny the SEC
legally and financially seperated from owner
owners don´t have responsibility for company
company´s owners and managers are often not the same
units of ownership in a corporation
chares of common stock - given to owner after they put money into a business
resources used to start and run a business
capital
net income
all revenues - all expenses
= profit
advantages of corporations
owners have limited liabilities
investors can diversify their financial risks
transferable ownership rights
ability to aquire capital
disadvantages of corporations
corporate income is taxed twice
many regulations
management and ownership have different understanding about company´s actions
what are dividends
earnings of a corporation distributed to its owners
what is a loan made of
principle - the amount borrowed
interest - coast of borrowing money
the 4 basic financial statments of a business
income statement
balance sheet
statement of changes in shareholders´ equity
statement of cash flow
what is the set of guidelines in the US called financial statements need to line up with
generally accepted accounting principles (GAAP)
responsibilities of the Securities and Exchange Commisison (SEC)
monitor stock market and financial reportings of firms that trade in market
controls FASB and PCAOB
responsibilities of financial accounting standarts board (FSAB)
sets accounting standarts
get authority from SEC
sets together with SEC the GAAP standarts
responsibilities of Public Company Accounting Oversight Board (PCAOB)
oversees auditing profession and public company audits
mandated by the Sarbanes-Oxley Act (SOX) 2002
international set of accounting standards
International Financial Accounting Standards (IFRS)
more principle based
what group sets the IFRS
International Accounting Standard Board (IASB)
4 largest accounting firms
Ernst and Young (EY)
PriceWaterhouseCoopers (PWC)
Deliotte
KPMG
3 categories of business transactions
operating activities
investing activities
financing activities
operating activities
transactions realted to general operations of firm
investing activities
transactions related to buying and selling of items the firm uses for longer than a year
financing activities
transactions related to how a firm get funding
basic accounting equation
assets = liabilities + stockholder´s equity
what are assets
recources owned by the business
subcategories of assets
current assets investments property, pant and equipment intangible assets other assets
what are current assets
cash accounts revailable inventory supplies - used within 1 year prepaid insurance
what are investments
stock of other companies
what is property, plant and equipment
also called fixed assets
land building equipment - useful for longer than a year
what are intangible assets
patents
trademarks
copyrights
what are other assets
defferred taxes
what are liabilities
obligations of a business to another entity
whatever the company owes to somebody else
subsections of liabilities
current liabilities
non-current liabilities
examples for current liabilities
obligations within one year
accounts payable
wages and salaries payable
taxes
non-current liabilities
obligations that need to be paid after 1 year
mortgage payable
bonds payable
what are accounts payable
materials purchased but not payed for due to the due date of the balance sheet
need to be paid within 120 days
what is stockholder´s equity
the owners´ claims to the assets of the company
subsections of stockholder´s equity
contributed capital (common stock) retained earning revenue expenses dividents
what is common stock
evidence that owner invested into business
what is revenue
increase in assets due to service or selling
what are expenses
costs of doing business
use of resources to generate revenue
what are dividents
earnings of a corporation distributed to the owners for personal use
what are retained earnings
net income(loss) - dividents
example for expenses
rent expenses
advertising expenses
utilities expenses
salary and wages
characteristics of income statements
activity of a company during an accounting period
all revenues - all expenses during a period
characteristics of balance sheets
based on assets = liabilities + shareholder´s equity financial situation of a company at specific point in time
summary of assets, liabilities and shareholder´s equity
what are comparative balance sheets
balance sheet at the beginning as well as at then end of a fiscial year
what equation is an income statement based on
revenue - expenses = Net Income / Loss
how is a statement of changes in owners´ equity organized
starts with beginning amount of contributed capital and beginning amounts of retained earnings
shows additions and deductions
total contributed capital and retained earnings get added together to show ending balance
characteristics of statement of cash flow
list of all cash that came in or left a business during fiscial period
3 subsections of statement of cash flow
cash from operating activities
cash from investing activities
cash from financing activities
what is the technology called to file 10K reports
XBRL (Extensible Business Reporting Language)
what are two forms of income statements
single step income statement
multistep income statement
single step income statement
group all revenue tother first and then subtract group of all the expenses
multistep income statement
first largest revenue - largest expense, related to the revenue = subtotal called gross margin
what is essential in a annual financial statement besides the 4 basic statements
notes
what is a consolidated financial statement
other firms controlled by the mother company are in the statement included
what is a risk
something that exposes the business to potential loss or injury
risk comes always with potential rewards
what is th expended accounting equation
assets = liabilities + common stock + revenue - expenses - dividents + retained earnings
what increases/decreases stockholders´ equity
revenue and common stock - increase
expenses and dividends - decrease
