Chapter 1 - A Framework for Financial Accounting Flashcards
Corporation
An entity that is legally separate from its owners and pays its own income taxes
Limited liability
Prevents stockholders from being held personally responsible for the financial obligations of a corporation
Sole proprietorship
A business owned by one person
Partnership
A business owned by two or more persons
Assets
The resources a company owns
Liabilities
Amounts owed to third parties
Some examples would be salaries, taxes, loans, utilities, and rent (payable)
Equity
The assets remaining in a business once all liabilities have been deducted
Also sometimes referred to as the book value of a company
Revenues
The sales a company makes
Expenses
Costs of providing products and services and other business activities
Net income
Profitability reported in the income statement, consisting of all revenues and expenses
Dividends
Distributions to stockholders, typically in the form of cash; rewards to shareholders for holding on to a company’s stock
Does NOT count as an expense (instead should be in statement of stockholders’ equity)
Accounting equation
A = L + SE
A: assets
L: liabilities
SE: stockholder’s equity
Net income equation
R - E = NI
R: revenue
E: expenses
NI: net income
Financial statements
Periodic reports published by the company for the purpose of providing information to external parties
What are the 4 financial statements?
Balance sheet
Income statement
Statement of Stockholder’s Equity
Statement of Cash Flows
Balance sheet
A financial statement that presents the financial position of the company on a particular date
A balance sheet presents assets, liabilities, and stockholders’ equity
Income statement
A financial statement that reports the company’s revenues and expenses over an interval of time
Statement of stockholders’ equity
A financial statement that summarizes the changes in stockholders’ equity over time
Statement of cash flows
A financial statement that measures the inflow and outflow of cash over a period of time
Account
A record of the business activities related to a particular item
An individual record of the increases and decreases in a specific asset, liability, or equity item
Common stock
Ownership shares of the company; external source of equity
Retained earnings
Measure of the income that is earned by the company, reinvested in
the business and not distributed to its shareholders
GAAP (generally accepted accounting principles)
The rules that govern U.S financial reporting
What are the 3 different business activities?
Financing, investing, operating
What falls under financing?
Debt financing: Borrowing money from creditors
Equity financing: Selling stock to investors
One of the 3 different business activities
What counts as investing?
Bigger, long-term investments a company makes like purchasing/selling land, buildings, and equipment
One of the 3 different business activities
What are operation costs?
The cost of day-to-day activities which is necessary for long-term success
One of the 3 different business activities
Accounts receivable
What is it classified as? An asset or liability?
The right to receive cash payments for goods or services provided; how much you’re owed. Classified as an asset
(although the money has not been received yet)
Accounts payable
What is it classified as? An asset or liability?
Money owed to others for goods or services already provided. Classified as a liability
Annual Report (Form 10-K)
Includes the 4 financial statements, notes to financial statements, auditor’s report, and management’s discussion and analysis (MD&A)
