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Accounting > Chapter 1 > Flashcards

Chapter 1 Flashcards

1
Q

Who uses financial accounting? (5)

A

1) shareholders
2) creditors
3) managers and directors
4) financial analysts
5) other users

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2
Q

Shareholder

A

owners of a corporation that own stock; rely on financial statements to evaluate performance

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3
Q

Sole proprietorship company

A

Single owner who manages daily operations (small family business)

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4
Q

Partnership company

A

Two or more owners of a company (lawyer, CPA)

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5
Q

Limited liability company (LLC)

A

New business; similar to a corporation but more flexibility

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6
Q

New York Stock Exchange (NYSE) and NASDAQ

A

Issue stock via organized exchanges

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7
Q

Separation of ownership

A

Sell stock to raise capital, CEO owns less

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8
Q

Accounting

A

Process of recording, summarizing, and analyzing financial transactions

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9
Q

Creditors- how do they use financial statements

A

Companies borrow from banks/lenders; interested in borrower’s ability to repay; determine loan terms, loan amount, interest rate, collateral

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10
Q

Suppliers- how do they use financial statements

A

Financial information establishes credit terms and commitment to relationships

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11
Q

Managers and directors- - how do they use financial statements

A

Often have incentives tied to financial reports; board of directors- publicly traded companies are required to have them, elected by shareholders; leverage other company reports to make decisions

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12
Q

Financial analysts- how do they use financial statements

A

Decision makers rely on analysts; dissemination of financial information to identify/assess risk, forecast performance, establish price, make investor decisions

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13
Q

Others- how do they use financial statements

A

Prospective employees- learn about companies; labor unions- assess health prior to negotiating; customers- ability to deliver products/services

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14
Q

Costs of disclosure

A

Costs of accountants, costs imposed by competitors- learn about products/strategies to reduce competitive advantage; raise investor expectations; political cost of regulation/taxation

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15
Q

Benefits of disclosure

A

Lowers financing and operating costs, bank uses info to determine interest

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16
Q

What are the 4 business activities as part of accounting?

A

1) planning activities
2) investing activities
2) financing activities
3) operating activities

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17
Q

How are planning activities influenced by accounting?

A

Company goal/strategy creates value for owners; strategic plan reviews market conditions, competition, opportunities, and threats

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18
Q

How are investing activities influenced by accounting?

A

Acquiring/disposing resources needed to sell; companies have a different mix of assets depending on business model (online only vs brick/mortar); also will vary if assets are short term or long term

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19
Q

How are financing activities influenced by accounting?

A

Methods company uses to fund investments

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20
Q

Financial management

A

Planning of resource needs/financing resources

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21
Q

What are the sources of financing activities?

A

1) equity (owner) financing

2) liability- creditor (or debt) financing

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22
Q

Equity (owner) financing

A

Funds contributed by owners with income retained in the company; does not impose repayment obligation

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23
Q

Liability- creditor (debt) financing

A

Funds by non-owners; company must pay in future- legal obligation to pay back

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24
Q

What is the accounting equation?

A

Investing=financing

investing assets= liabilities (financing)+equity (owner financing)

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25
Q

How are operating activities influenced by accounting?

A

Promotion, selling product/service; input market generates operating expenses (inventory, salary, material, logistics); output market generates operating revenue (sales) but also generate expenses- marketing, distributing

26
Q

Operating income

A

If operating revenue > operating expense; if expense is more than revenue, operating loss

27
Q

Revenue

A

Increase in equity from sale of goods or service to customer before deducting expenses

28
Q

Expense

A

Costs incurred to generate revenue- cost of goods sold and other business activities

29
Q

Income equation

A

income= revenues-expenses

30
Q

What are the 4 financial statements?

A

1) balance sheet
2) income statement
3) statement of stockholders equity
4) statement of cash flows

31
Q

Define balance sheet

A

Investments and sources of financing using accounting equation; summarizes company’s investing/financing activities by listing assets, liabilities, and equity; amounts carry over from the end of one fiscal year to the beginning of the next

Point in time

32
Q

Define income statement

A

Results of operations; company’s operating activities over time, details revenues and expenses- difference is net income

Period of time

33
Q

Define statement of stockholder equity

A

Change in owner financing; change in equity accounts over time; includes contributed capital, retained earnings, other stockholders equity

Period of time

34
Q

Define statement of cash flows

A

Sources/uses of cash; reports net cash flow from operating, investing, and financing activities over a period of time

Period of time

35
Q

What equation is applicable for the balance sheet?

A

Assets= liabilities + equity

36
Q

What equation is applicable for the balance sheet?

A

Net income= revenue- expense

37
Q

Gross profit

A

Revenue- cost of goods sold (COGs)

38
Q

Contributed capital

A

Common stock; net amount received from issuing stock to shareholders (owners)

39
Q

Retained earnings

A

Income the company has earned since inception minus shareholders dividends; aka income retained in company

40
Q

Operating cash flow

A

Cash generated from operating activities; differs from net income due to difference when revenue and expenses recorded

41
Q

Generally accepted accounting principles (GAAP)

A

Set of standards and procedures, not set laws, guide prep of financial statements; companies use discretion to balance between constraints and flexibility

42
Q

Securities Act

A

After stock crash in 1929, required to disclose financials on securities for public sale and prohibit deceit/misrepresentation/fraud of security sale

43
Q

Security and Exchange Commission (SEC)

A

Regulate issuance and security trading- companies with more than $10m in assets and securities held by more than 500 owners must file annual/periodic reports, including set of financial statements

44
Q

American Institute of Certified Public Accountants (AICPA)

A

Professional body that sets accounting standards; resulted in 3 standard setting organizations

45
Q

3 standard setting organizations of AICPA

A

1) financial accounting standards board (FASB)
2) Sarbanes-Oxley Act (SOX)
3) public accounting oversight board (PCAOB)

46
Q

Financial Accounting Standards Board (FASB)

A

Part of AICPA- American Institute of Certified Public Accountants

7 member board responsible for setting financial accounting in the US; single source of authoritative, nongov US GAAP; developed framework of proposed future standards and for accountants to report info not governed by specific standards

47
Q

Sarbanes-Oxley Act (SOX)

A

Part of AICPA- American Institute of Certified Public Accountants

Post scandal, paused in 2002 to ensure reporting quality to increase confidence to improve internal controls

48
Q

Public accounting oversight board (PCAOB)

A

Part of AICPA- American Institute of Certified Public Accountants

Approve auditing standards and monitor quality of financial statements and audits

49
Q

How SOX increases internal controls

A

Increase management responsibility, increase auditor independence, increase accountability of board of directors, establish internal controls to prevent fraud

requires that CEO and CFO of publicly traded corporations sign off personally on statements or penalized

50
Q

SOX impact

A

3x company restatement of reports; costs of reporting and auditing; have relaxed requirements for some companies, high penalties on management might make companies less forthcoming with estimates

51
Q

Audit

A

Auditor audits statements; independent firm to provide opinion of statements if they are fairly presented and respects company’s financial condition/result of operations

Not a guarantee, reasonable assurance that the statements aren’t misrepresented, required for public corporations

52
Q

International accounting standards board (IASB)

A

Oversees development of standards outside of US

53
Q

International financial reporting standards (IFRS)

A

Developed by IASB- 100+ countries including the EU; not use in the US (GAAP is); goal is to become compatible but there are some differences

54
Q

Profitability

A

Whether a company is able to bring its product or service to the market in an efficient manner and if market values the product or service

55
Q

What equation shows profitability?

A

Return on equity

ROE= net income/average stockholders equity

56
Q

Return on equity equation

A

ROE= net income/average stockholders equity

ROE 10% and up: reasonable returns; higher risk company could have higher ROE while less risky could have lower ROE

57
Q

Credit risk

A

Risks associated with investing or lending; increase risk, increase return demanded by investors

58
Q

Solvency

A

Ability to remain in business and avoid bankruptcy or financial distress

59
Q

What equation shows credit risk/solvency?

A

Debt to equity

D/E= total liabilities/total stockholders equity

60
Q

Debt to equity equation

A

Total liabilities/total stockholders equity

DE of 1 means equal parts debt/equity; DE depends on business and long term commitments

61
Q

Blockchain

A

Digital ledger that provides secure means for approved parties to view recorded transactions

Accounting (9 decks)

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