Chapter 1: Accounting and the Financial Statements Flashcards
a company’s annual report
Form 10-K
a summary of the results of a company’s operations
Financial Statements
the process of identifying, measuring, recording, and communicating financial information about a company’s activities so decision makers can make informed decisions
accounting
accounting is the “language of __________”
business
Demand for accounting information coming from OUTSIDE the business is called:
financial accounting
Demand for accounting information coming from INSIDE the business is called:
managerial accounting
Who are the users in financial accounting?
Investors (owners), and creditors (lenders)
Who are the users in managerial accounting?
Managers
accounting and reporting to satisfy the outside demand (primarily investors and creditors) for accounting information
financial accounting
use accounting information to evaluate the future prospects of a company and decide where to invest their money
investors (owners)
use accounting information to evaluate whether to loan money to a company
creditors (lenders)
What are the three other external users for financial accounting?
governmental agencies, labor unions, financial analysts
What are the four basic financial statements?
- The Balance Sheet
- The Income Statement
- The Retained Earnings Statement
- The Statement of Cash Flows
a business that has an identity separate from that of its owners and managers and for which accounting records are kept
accounting entity
a business owned by one person
sole proprietorship
Who is personally responsible for the debt of the business in a sole proprietorship?
the owner
Which type of business organization does this describe?
- Accounts for more than 70% of all businesses.
- Usually small, local businesses
- Simple to set up and owner has control over business
- Can be formed or dissolved at the wishes of the owner
Sole Proprietorship
a business owned jointly by two or more individuals
partnership
What type of business organization does this describe?
- Small businesses and many professional practices (physicians, lawyers, accountants) often organized as this type of business
- Provide increased access to financial resources and the individual skills of each of the partners
- Each partner pays taxes at his or her individual rate
- Partners are jointly responsible for all the debt of the _________.
Partnership
a company chartered by the state to conduct business as an “artificial person” and owned by one or more stockholders (ex: Apple)
corporation
whose ownership interests are represented by shares of stock
stockholders
What business organization do these advantages describe:
- The ability to raise capital by selling new shares
- The limited legal liability of owners
- The transferability of shares
corporation
What business organization do these disadvantages describe:
- requirements to form this type of organization are more complex than the others
- owners generally pay more taxes
corporation
T or F: the stockholder’s legal responsibility for the debt of the business is limited to the amount they invested in the business
True
What are the two reasons owners generally pay more taxes in a corporation business organization?
- The corporate income tax rare is greater than the individual income tax rate
- A corporations income is taxed twice (called double taxation)
What are the three types of business activities?
- Financing
- Investing
- Operating
obtaining funds to start a business (from owners or creditors) through either issuing stock or borrowing money
financing activities
buying resources (assets) used to generate revenues
investing activities
operating the business to earn a profit
operating activities
T or F: when borrowing money from another entity such as a bank, the business must repay the amount borrowed
True
the person to whom money is owed (ex: bank)
creditor
obligation to repay a creditor; can take many forms
liability
a corporation borrowing money with the promise to repay the amount borrowed plus interest at a future date
notes payable
special form of note payable used by corporations to obtain large amounts of money
bond payable
the dollar amount paid to a corporation for the shares of stock and represents the basic ownership interest in a corporation
common stock
the corporation isn’t obligated to repay the stockholder the amount invested; however many corporations distribute a portion of their earnings to stockholders in a regular basis. These distributions are called:
dividends
economic resources representing expected future economic benefits controlled by the business (ex: cash, accounts receivable, inventory, land, buildings, equipment, and intangible resources)
assets
the owner’s claims against the assets of a corporation after all liabilities have been deducted (considered a residual interest in the assets of a corporation that remain after deducting its liabilities)
stockholder’s equity
What are two examples of intangible assets?
copyrights and patents
the purchase and sale of assets used in operations (operating assets) are a corporation’s ___________ activities.
investing
T or F: All businesses want to generate revenue
True
the increase in assets that results from the sale of products or services
revenue
the right to collect an amount due from customers (a type of asset)
accounts receivable
the cost of assets used, or the liabilities created, in the operation of the business
expenses
What are the three different types of liabilities that arise from operating activities?
- Account payable
- Wages payable
- Income Taxes payable
if a corporation purchases goods on credit from a supplier, the obligation to repay the supplier
account payable
amounts owed to employees for work performed
wages payable
taxes owed to the government
income taxes payable
If revenues > expenses, then a corporation has earned:
net income
If expenses > revenues, then a corporation has incurred:
a net loss
Revenues - expenses =
net income
Expenses - revenues =
net loss
a set of standardized reports in which the detailed transactions of a company’s activities are reported and summarized so they can be communicated to decision-makers
financial statements
