CHAPTER 1 Flashcards
What is a Financial Statement?
Business documents companies use to report the results of their activities to people and groups that can include managers, investors, creditors, and regulatory agencies.
How is a Financial Statement used?
Used to make a variety of decisions, such as whether to invest in or loan money to the companies.
What are four basic financial statements?
Income Statement (known was the Statement of Operations) - Statement on retained earnings (usually included in the statement of stockholders equity) - Balance Sheet (state of financial position) - Statement of Cash Flows
What is Accounting?
It is an information system that measures business activities, processes data into financial statements and reports, and communications results to decision makers.
What is the accounting cycle?
The process by which financial statements are prepared.
What is Financial accounting?
The branch of accounting that provides relevant and accurate information to people outside the firm such as investors, creditors and the public.
What is managerial accounting?
The branch of accounting that provides accurate and relevant information to people inside the organization. such as managers. This includes budgets, forecasts and projections use to make strategic decisions.
What are the 4 most common types of business?
Proprietorship, Partnership, Limited-liability company, Corporation
Describe a proprietorship?
It has a single owner. Tend to be small retail stores or solo providers of services. Legally, the business is the proprietor and the the proprietor is personally liable for the business debts. It is a distinct entity, separate from its proprietor so the business records should be kept separate from the proprietors personal finances.
Describe a partnership?
It has two or more parties as co-owners and each owner is a partner. Individuals, corporations, partnerships or other types of entities can be parnters. Income and losses of the partnership “flow through” to the partners and the recognize them based on their agreed upon percentage interest in the business. The partnership does not pay taxes. Instead each partner pays taxes based on the partner’s individual or corporate rate. These are governed in the form of a contract between the partners.
Whats the difference between a general partnership and a limited liability partnership (LLP)?
In a GP, each partner can conduct business on behalf of the organization and can make agreement that legally bind all partners. These can be risky because an irresponsible partner can create large debts for the other general partners without their permission. In a LLP, each partner is liable for the partnerships debts only in to the extend of his or her investment in the partnership. In a LLP, there must be a general partner with unlimited liability for the partnerships debts.
What is a Limited- Liability Company?
It is one in which the business (and not the owner) is liable for the company’s debts. An LLC may have one owner of many owners, called member; these members have limited liability for the LLC’s debts only up to the extent of their investments in the LLC. The income “flows through” to the members, and they pay income taxes at their own tax rates.
What is a corporation?
It is a business owner by stockholders or shareholders, who own stock representing shares of ownership in the corporation. Being able to raise large sums of capital by issuing shares of stock to the public is a major advantage. All types of business entities may be shareholders in a corporation. These tend to be larger in terms of their assets, income, and number of employees. A Corporation must be formed under state land and legally distinct from its owners; it is an artificial person and possesses similar rights. Stockholders have no personal obligation for the corporations debt. Unlike other entities, corps pay business income tax.
What is the objective of accounting?
To provide financial information about the reporting entity that existing and potential investors, lenders and other creditors to make decisions.
What are the fundamental qualitative characteristics?
Relevance and faithful representation. Relevant so the information is useful to decision makers in helping them predict or confirm a organizations value. Must be material, which means it must be important enough that, if it were omitted or incorrect, it would a user’s decision. To make a faithful representation, the information must be complete, neutral and free from error. This makes the information reliable to users.
What are the enhancing qualitative characteristics?
Comparability (so it can be compared to other companies and consistent to other years), verifiability (possible to check the information for accuracy), timeliness (available to users early enough to help make them decisions), understandibility (information is transparent, so that it makes sent to reasonably informed users of the information)
What is the entity assumption?
The most basic accounting assumption is the entity, which is any organization or section that stands apart from other organizations and individuals, as a separate economic unit. An example is that the Walt Disney and its CEO - DISNEY is an entity separate from its CEO and vice versa.
What is a segment?
A division or subset of a business’s operations.
What is the Continuity (Going-Concern) assumption?
It says that a business should stay in business long enough to convert its inventories and receivables to cash and pay off its obligations in the ordinary course of business and to continue this process of operating into the future.
What is the historical cost principle?
States that assets should be recorded at their actual cost, measured on the date of purchase as the amount cash paid plus noncash types of compensation given in exchange. (How much it was bought for)
