Chapter 1 Flashcards
external users
investors
creditors: e.g. bankers and suppliers. loans and on credit sells.
tax authorities
customers : for product waranty and production line support
labour unions: for wages
Regulatory agencies: is operating according to rules?
cogress law for ethic accounting
Sarbanes-Oxley Act (SOX).
Effective financial reporting depends on
sound ethical behavior
Sarbanes-Oxley Act (SOX) entails
Top management must now certify the accuracy of financial information.
Penalties for fraudulent activity increased.
Independence of auditors who review the accuracy of corporate financial statements increased.
oversight role of boards of directors increased.
three type of business activities
financing,
investing,
operating.
what activities does the accounting information system track?
financing, collecting the necessary funds
to support the business
investing, acquiring the resources necessary to run the business
operating. putting the resources of the business into
action to generate a profit.
primary sources of outside funds
Borrowing money (debt)
Issuing shares of stock for cash (equity).
liabilities
Amounts owed to creditors such as debt and other obligations.
creditors
Party to whom amounts are owed
types of liabilities
Notes payable
bonds payable
Common stock
term used to describe the amount paid by stockholders for shares they purchase.
dividends
Payments to stockholders
assets
Resources owned by a business
Revenues
the increase in assets or decrease in liabilities resulting from the sale of goods or the performance of services in the normal course of business.
Amounts earned from the sale of products and other sources (sales revenue, service revenue, and interest revenue).
types of revenue
sales revenue, service revenue, and interest revenue
Inventory
Goods available for sale to customers.
service companies dont have it.
includes both finalized and unfinished goods.
Accounts receivable
Right to receive money from a customer as the result of a sale.
Expenses
cost of assets consumed or services used in the process of generating revenues. (cost of goods sold, selling, marketing, administrative, interest, and income taxes expense).
Liabilities arising from expenses
accounts payable, interest payable, wages payable, sales taxes payable, and income taxes payable.
Net income
The amount by which revenues exceed expenses.
Is tranferred from income statement to retained earnings to determine the ending balance in retained earnings.
Net loss
The amount by which expenses exceed revenues.
types of financial statements
Income Statement
Retained Earnings Statement
Balance Sheet
Statement of Cash Flows
The primary types of financial statements required by International Financial Reporting Standards (IFRS) and U.S. generally accepted accounting principles (GAAP) are
same
what does income statement include
Reports revenues and expenses for a specific period of time.
Net income
Net loss
Past net income provides information for
predicting future net income.
The income statement include
the company,
the type of statement,
the time period covered.
Sometimes, another line indicates the unit of measure, e.g., “in thousands” or “in millions.”
sole proprietorship
A business owned by one person
simple to stablish-No legal procedure
high individual control
tax advantage (only income tax)
business and individual are same entity
liable to being personally suied
high risk
cannot be inherited or sold
e.g barber shops, law offi ces, and auto repair shops
Types of risk
financial
operational
legal
partnership
often formed because one individual does not have enough economic resources to initiate or expand the business.
easy to stablish- may need partnership agreement but not lawers
2 or more individuals make the business
shared control
advantage of different skills
shared expenses
tax advantage (only income tax)
e.g. Retail and service-type businesses, including professional practices (lawyers, doctors, architects, and certifi ed public accountants)
corporation
defenition: A business organized as a separate legal entity owned by stockholders is a corporations.
company has legal right
has shareholders and can sell shares
hard to set-up
easier to transfer ownership
easier to rais funds
no personal liability
Users of financial statement
internal: whoever works for company specially managers
external: including investors and shareholders
All businesses involve in three types of activity
financing: to raise money
investing: purchase of the resources a company needs in order to operate. getting long term assets (more than 1 year assets)
operating: running the business. service or goods.
accounting tracks all these.
sources of outside funds
borrowing (debt)
selling shares of stock (equity) or in general finding investors to invest in your company
liabilities
amount owned
creditors
note payable: short-term loans
bond payable: long-term loans. definition: borrow directly from investors by issuing debt securities.
only public companies. bonds are loan contracts.
hybrid businesses
combine the tax advantages of partnerships with the limited liability of corporations. Probably the most common among
these hybrids types are limited liability companies (LLCs) and subchapter S corporations.
The purpose of financial information
to provide inputs for decision-making.
supplies
assets used in day-to-day operations.
account receivable
account payable
the right to receive money in the future.
obligation to pay
Income statement
reports a company’s revenues and expenses and resulting net income or net loss for a specific period of time.
Shows a companies success.
helps users determine if the company’s operations are profitable.
Creditors use the income statement to predict future earnings
Amounts received from issuing stock are not revenues, and amounts paid out as dividends are not expenses. so, they are not reported on the income statement
Income statement
reports a company’s revenues and expenses and resulting net income or net loss for a specific period of time.
Shows a companies success.
helps users determine if the company’s operations are profitable.
Creditors use the income statement to predict future earnings
Amounts received from issuing stock are not revenues, and amounts paid out as dividends are not expenses. so, they are not reported on the income statement
Retained earnings statement
summarizes the amounts and causes of changes in retained
earnings for a specific time period.
Retained earnings is the net income retained in the corporation.
The time period is the same as that covered by the income statement
First line consists of beginning retained earning. Then adds net income and deducts dividends.
helps users determine the company’s
policy toward dividends and
growth.
The heading identifies the company, the type of statement, and the time period covered.
Ending balance in retained earnings is needed in preparing the balance sheet.
Balance sheet
reports the assets and claims to those assets at a specific point in time.
shows what the business owns (assets) and what it owes (liabilities)
two types of claims to assets: claims of creditors called liabilities and claims of owners called stockholder’s equity. Assets = Liabilities + Stockholders’ Equity
lists assets first, followed by liabilities and stockholders’
equity
helps users determine if the company relies on debt or stockholders’ equity to finance its assets.
Stockholders’ equity is comprised of : (1) common stock and (2) retained earnings
Creditors analyze a company’s balance sheet to determine the likelihood that they will be repaid.The balance sheet will also be used to evaluate the relationship between debt and stockholders’ equity to determine whether the company has a satisfactory proportion of debt and common stock financing.
Statement of cash flows
provides financial information about the cash receipts and cash
payments of a business for a specific period of time.
shows where the cash was received and how it was used. reports the cash effects of a company’s operating, investing, and financing activities.
helps users determine if the company generates enough cash from operations to fund its investing activities.
shows the net increase or decrease in cash during the period, and the amount of cash at the end of the period.
provides answers to:
- Where did cash come from during the period?
- How was cash used during the period?
- What was the change in the cash balance during the period?
The heading of this statement identifi es the company, the type of statement, and the time period covered by the statement.
International Financial Reporting Standards (IFRS)
U.S Generally Accepted Accounting Principles (GAAP)
use same primary types of financial statements.
Neither is very specific regarding format of statements.
In practice some differences exist.
basic accounting equation
Assets = Liabilities + Stockholders’ Equity
cash
most important resource
Main lines in statement of cash flows
Cash flows from operating activities
Cash flows from investing activities
Cash flows from fi nancing activities
Net increase in cash
Cash at beginning of period
Cash at end of period
Main lines in balance sheet
Assets (+Total assets)
Liabilities and Stockholders’ Equity (+Total liabilities and stockholders’ equity)
Main lines in retained earnings statement
Retained earnings, x/x/x (previous)
Add: Net income
Less: Dividends
Retained earnings, x/x/x (end of this accounting period)
Main lines of income statement
Revenues
Expenses
Net income
relationship of statements
net income goes from income statement to retained earning
retained earning amount from the retained earning statement goes to the ballance sheet.
The ending amount of cash shown on the statement of cash
flows must agree with the amount of cash on the balance sheet.
relationship of statements
net income goes from income statement to retained earning
retained earning amount from the retained earning statement goes to the ballance sheet.
The ending amount of cash shown on the statement of cash
flows must agree with the amount of cash on the balance sheet.
Company annual reports include
Financial statements.
Management discussion and analysis.
Notes to the financial statements.
Auditor’s report. (all are necessary)
Management discussion and analysis (MD&A)
A section of the annual report that presents management’s views on the company’s results of operations and ability to pay near-term obligations, fund operations and expansion.
Management must highlight favorable or unfavorable trends and identify significant events and uncertainties that affect these three factors (mentioned at the paragraph above). This discussion obviously involves a number of subjective estimates and opinions.
Notes to the financial statements
Notes clarify information presented in the financial statements and provide additional detail.
Explanatory notes and supporting schedules.
integral part of the financial statements
does not have to be quantifi able (numeric)
e.g. descriptions of the significant accounting policies and methods used in preparing the statements, explanations of uncertainties and contingencies, and statistics and details too voluminous to be included in the statements.
Auditor’s report
states the auditor’s opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with generally accepted accounting principles.
prepared by an independent outside auditor
If auditor is satisfied he expresses an unqualified opinion. anything els is suspicous.
Certified public accountant (CPA)
An individual who has met certain criteria and is thus allowed to perform audits of corporations.
Certified public accountant (CPA)
An individual who has met certain criteria and is thus allowed to perform audits of corporations.
unethical financial reporting results in
economy would suffer if investors lost confidence in corporate accounting
examples of expenses
Salaries and wages
Rent
Supplies
Depreciation
Interest
Insurance
examples of assets in ballance sheet
Cash
Accounts receivable
Supplies
Prepaid insurance
Equipment, net
examples of liabilities in ballance sheet
Notes payable
Accounts payable
Unearned service revenue
Salaries and wages payable
Interest payable
examples of items in statement of cash flows
Cash flows from operating activities
Cash receipts from operating activities
Cash payments for operating activities
Net cash provided by operating activities
Cash flows from investing activities
Purchased equipment
Net cash used by investing activities
Cash flows from financing activities
Issuance of common stock
Issued note payable
Payment of dividend
Net cash provided by financing activities
Net increase in cash
Cash at beginning of period
Cash at end of period
examples of items in statement of cash flows
Cash flows from operating activities
Cash receipts from operating activities
Cash payments for operating activities
Net cash provided by operating activities
Cash flows from investing activities
Purchased equipment
Net cash used by investing activities
Cash flows from financing activities
Issuance of common stock
Issued note payable
Payment of dividend
Net cash provided by financing activities
Net increase in cash
Cash at beginning of period
Cash at end of period
equipment goes to which statement
equipment to ballance sheet
equipment expense to income statement
equipment goes to which statement
equipment to ballance sheet
equipment expense to income statement
good students
marzieh Navayi
jasmeet singh
insha akhtar
order of items in income statement
cash
account receivables
inventory
prepaid expense
how often do we have to provide the public with financial report according to law
every year
how often do we have to provide the public with financial report according to law
every year
what should we do before interview
go to company website download annual report and read mda report
