Chapter 1 Flashcards
Business Organization owned by one person. The owner is personally liable for all debts of the business.
Sole Proprietorship
Business organization owned by two or more people. Each partner is personally liable for all debts of the business.
Partnership
A separate legal entity. Owners of corporations (stockholders) are not personally liable for debts of the corporation.
Corporation
True or False: Accounting is a system of analyzing, recording, summarizing, and reporting the results of a business’s activities.
True
External users _____ the company.
Evaluate
Internal users _______ the company.
Run
The financial reports of a business are assumed to include the results of only that business’s activities.
Separate Entity Assumption
Resources owned
Assets
Resources owed to creditors
Liabilities
Resources owed to stockholders
Stockholders Equity
Basic Accounting Equation
Assets = Liabilities + Stockholders Equity
Economic resources presently controlled by the company that have measurable value and are expected to benefit the company by producing cash inflows or reducing cash outflows in the future.
Assets
Measurable amounts that the company owes to creditors.
Liabilities
Owners claims to the business resources.
Stockholder’s Equity
Equity paid in by stockholders
Common Stock
Equity earned by the company
Retained Earnings
Net Income Equation
Net Income = Revenue - Expenses
Sales of goods or services to customers, measured at the amount the business charges the customer.
Revenues
The costs of doing business necessary to earn revenues, including wages to employees, advertising, insurance, utilities, and supplies used in the office.
Expenses
Distributions of a company’s earning to its stockholders as a return on their investment.
Dividends
True or False: Dividends are not expenses.
True
Order in which you prepare financial statements:
(1) Income Statement
(2) Statement of Retained Earnings
(3) Balance Sheet
(4) Statement of Cash Flows
The unit of measure assumption states that results of business activities should be reported in an appropriate monetary unit
The Income Statement
Reports the way that net income and the distribution of dividends affected the financial position of the company during the period.
The Statement of Retained Earnings
What a business owns
Assets
What it owes to creditors
Liabilities
What is left over for the owners of the company’s
Stockholder’s Equity
Summarizes how a business’s operating, investing, and financing activities caused its cash balance to change over a particular period of time.
Statement of Cash Flows
Relationships Among the Financial Statements
(1) Net income from the income statement is a component in determining ending Retained Earnings on the Statement of Retained Earnings.
(2) Ending Retained Earnings from the Statement of Retained Earnings is then reported on the Balance Sheet.
(3) Cash on the Balance Sheet is equal to the ending Cash reported on the Statement of Cash Flows.
Creditors
(1) Is the company generating enough cash to pay what it owes?
(2) Does the company have enough assets to cover its liabilities?
Investors
(1) What is the immediate return on my contributions?
(2) What is the long term return (through stock price increases resulting from the company’s profits)?
External Financial Reporting Main Goal:
Provide useful information to external users for decision making
When faced with an ethical dilemma?
(1) Identify who will be affected by the situation
(2) Identify and evaluate the alternative course of action.
(3) Choose the alternative that is the most ethical.
