Chapter 1 (Accounting Basics) Flashcards
Forms of Business Organization
- Sole Proprietorship: A business owned by ___ person, the most ______ form of business
- Partnership: A business owned by ___ or more people, can have many partner owners
- Corporation: A separate legal _____, the owners of the corporation are called ____________, ____ business activity is conducted by corporations
one, common
two
entity, stockholders, most
Forms of Business Organization Continued
- Sole Proprietorship Advantages: It’s the _______ to form, enjoys ___ advantages (don’t have to pay ______ ___ for the business), sole owner controls the business
- Partnership Advantages: Relatively easy to form, enjoys the ____ tax advantages of a sole proprietorship, broader management skill set available (due to more people)
Disadvantage (For Both): Unlimited liability (personal ______ are at risk)
Corporation Advantages: The easiest to raise _______, easiest to transfer ownership, limited liability (personal assets separate from the business)
Disadvantages: harder to form, must pay ______ ___ (b/c it is a legal entity separate and distinct from its owners)
easiest, tax, income tax
same
assets
capital
income tax
Business Activities
- Financing activities:
____ financing - borrowing money from _________
______ financing - Selling _____ to investors
- Investing activities: involve the acquisition or disposition (arrangement) of items such as land, buildings, and equipment
- Operating activities: day-to-day activities of _________ and _______ a product or providing a service
- If operating activities generate excess cash, then it can be used to finance additional ___________, repay _________ (such as a bank), or pay dividends to ____________.
Debt, creditors
Equity, stock
producing and selling
investments, creditors, stockholders
Accounting Information & Its Use
- ________ users: financial statements serve useful for potential _________ (knowing how profitable a company is compared to competitors), creditors (how trustworthy is a company repaying debt), stockholders, and regulators (need to know if rate increases are justified).
- ________ users: management (need to known the profitability of each division), ________ department (need to know if there is enough cash to pay a company’s short-term expenses), and human resources.
Ethics
- Professional organizations of accountants, such as the American Institute of Certified Public Accountants (_____) have a code of ethics
- The Sarbanes-Oxley Act of 2002 was written to help deter unethical behavior (executives must _______ in writing the accuracy of its reported financial statement information)
External, investors
Internal, finance
AICPA, certify
The Accounting Process
- Accounting is the process of __________, _________, and _________ financial information that is used for decision making.
Generally Accepted Accounting Principles (____) change over time with changes in the business environment
- ___________ and ________ Commission (SEC): federal agency whose focus is to regulate the interstate sale of ______ and _____.
- Financial Accounting Standards Board (____): nongovernmental entity that reports to the SEC, and whose pronouncements establish the ____.
- Public Company Accounting Oversight Board (_____): approves ________ standards, known as ____.
- The International Accounting Standards Board (____): formulates the international financial reporting standards (____).
organizing, analyzing, and reporting
GAAP
Securities and Exchange, stocks and bonds
FASB, GAAP
PCAOB, auditing, GAAS
IASB, IFRS
Accounting Equation & Financial Statements
_ = _ + _
- Assets = _______’s resources
- Liabilities & Equity = claims on a company’s resources (L = ________ claims, E = owner claims)
- only the _______ sheet reports at a point in time
- The ______ statement reports results of operations for a given period of time (revenue, expenses, net income/loss)
- The Statement of Stockholders’ Equity: reports events causing an increase or decrease in a company’s stockholders’ equity during a given period of time
- capital contributed by
stockholders is listed as
______ stock, earned capital is
listed as ________ earnings.
A = L + E
company’s, creditor
income
common, retained
Financial Statements Continued
- Statement of ____ _____: reports cash inflows and outflows during a given period of time
- Order of financial statements: ______ statement, statement of ____________’ ______, ______ ______, statement of ____ _____
- net income/loss is used to compute earned capital on the statement of stockholders’ equity (also called ________ earnings)
- contributed capital (also called ______ stock), retained earnings, and total equity from the statement of stockholders’ equity are reported on the _______ _____
- the cash balance shown in assets on the balance sheet is shown on the statement of ____ _____
cash flows
income statement, statement of stockholders’ equity, balance sheet, statement of cash flows
retained
common, balance sheet
cash flows
Additional Annual Report Components
- All publicly traded companies in the U.S. must file a Form 10-K (______ report) with the SEC
- _____ to financial statements are integral, containing information about assumptions, estimates, accounting methods, and details behind summary numbers
- _______’s report: provides the auditor’s opinion regarding whether financial statements are fairly presented
- Management’s Discussion and Analysis (____): contains management’s interpretation of the company’s recent performance and financial conditions, and discussions of the company’s future plans
annual
notes
auditor’s
MD&A
Additional Annual Report Components Continued
- Environmental, social, and governance report (___): provides quantitative and qualitative measures on how the company addresses ESG issues
- Accountants ____ to consider ESG issues when applying accounting standards
ESG
need
Formulas From Practice Problems
- Ending Equity (EE) = Beginning Equity (BE) + Net Income (NI) - Dividends (D)
** In the context where common stock isn’t given**
This could be completely wrong
Accounts receivable on balance sheet = cash not immediately going to company
Ex. Customer at a coffee shop paying ______ instead of cash.
Credit
-Lenders make money by charging ________ (fixed rate of return). Investors purchase stock, looking for capital ____________ and dividends (potential earnings are theoretically ________).
- Debt is ____ risky from the perspective of the capital provider (lender/investor), b/c there are assets securing the loan. From the perspective of the company, debt is _______ b/c they have to pay it back.
- Accounting is the process of __________, _________, and communicating financial information that is used for decision making.
- External users (creditors, investors) evaluate a company using _________ accounting reports (backward looking)
- Internal users (managers) run the company, use __________ accounting reports (forward looking)
- GAAP is overseen by the ___, which also regulates the capital _______.
interest, appreciation, infinite
less, riskier
organizing, analyzing
financial
managerial
SEC, markets
A company funds its operations through 3 ways: ____, ____, and ______
cash, debt, and equity
