Chapter 1 - Financial Statements Flashcards
Business organization types
- Proprietorship
- Partnership
- LLC
- Corporation
Proprietorship
one owner, personally liable
Partnership
two or more owners; general partners personally liable, limited are not
LLC
members, not personally liable
Corporation
stockholders, not personally liable
GAAP
Generally Accepted Accounting Principles
formulated by FASB
IFRS
International Financial Reporting Standards
set by IASB
FASB
Financial Accounting Standards Board
IASB
International Accounting Standards Board
Fundamental Qualitative Characteristics
- relevance
* faithful representation
relevance
capable of making a difference to a decision maker, having predictive or confirming value
material
important enough to the informed user so that, if it were omitted or erroneous, it would make a difference in the user’s decision
faithful representation
reliable, and focused on the economic substance of a transaction, event, or circumstance
Enhancing Qualitative Characteristics
- comparability
- verifiability
- timeliness
- understandability
entity assumption
assumes that an organization stands apart as a separate economic unity
continuity assumption (going-concern)
assumes that an entity will continue to operate long enough to use existing assets
historical cost principle
assets should be recorded at their actual cost, measured on the date of purchase
stable-monetary-unit assumption
assumes that the purchasing power of a monetary unit is stable over time, ignores inflation
assets
economic resources that are expected to produce future benefit
liabilities
“outsider claims”
owner’s equity (or capital, or stockholders’ equity)
“insider claims”
fundamental accounting equation
Assets = Liabilities + Owner’s Equity
stockholders’ equity
Stockholders’ Equity = Paid-in Capital + Retained Earnings
paid-in capital
the amount stockholders have invested in the corporation; basic component is common stock
retained earnings
amount earned by income-producing activities kept for use by the business
revenues
inflows of resources that increase retained earnings by delivering goods or services to customers
expenses
resource outflows that decrease retained earnings due to operations
dividends
distributions to stockholders of assets (usually cash) generated by net income, which decrease retained earnings
dividends are not expenses
never affect net income
direct reductions of retained earnings
profit
excess of revenue over expenses
net income
when total revenues exceed total expenses
net loss
when total expenses exceed total revenues
net income equation
Net Income = Revenues – Expenses
exhibit 1-5
memorize
financial statements list
- Income Statement
- Statement of Retained Earnings
- Balance Sheet
- Statement of Cash Flows
Income Statement
measures operating performance, reporting revenues and expenses for the period
Income Statement structure
Revenues
(–) COGS = Gross profit
(–) Operating expenses = Income from operations
(–) Net other income and expense = Income before taxes
(–) Income tax expense = Net income
[Compared for two or more periods]
Statement of Retained Earnings
shows what a company did with its net income
Statement of Retained Earnings structure
Retained earnings (P-2)
(+) Net income (P-1)
(–) Cash dividends (P-1) = Retained earnings (P-1)
(–) Net income (P)
(–) Cash dividends (P) = Retained earnings (P)
Balance Sheet
measures financial position using assets, liabilities, and stockholders’ equity at a moment in time
Balance Sheet structure
…
Statement of Cash Flows
measures cash receipts and payments, using operating activities, investing activities, and financing activities
Statement of Cash Flows structure
…
accounting
the information system that measures business activities, processes that information into reports and financial statements, and communicates the results to decision makers
board of directors
group elected by stockholders to set policy for a corporation and to appoint its officers
capital
another name for the owner’s equity of a business
common stock
the most basic form of capital stock
corporation
a business owned by stockholders; a legal entity, an “artificial person”
current asset
an asset that is expected to be converted to cash, sold, or consumed during the next 12 months, or within the business’s normal operating cycle if longer than a year
current liability
a debt due to be paid within one year or within the entity’s operating cycle if the cycle is longer than one year
deficit
negative balance in retained earnings caused by net losses over a period of years
dividends
distributions (usually cash) by a corporation to its stockholders
entity
an organization or a section of an organization that, for accounting purposes, stands apart from other organizations and individuals as a separate economic unit
ethics
standards of right and wrong that transcend economic and legal boundaries
expenses
decrease in retained earnings that results from operations; the cost of doing business; opposite of revenues
fair value
the amount that a business could sell an asset for, or the amount that a business could pay to settle a liability
financial statements
business documents that report financial information about a business entity to decision makers
financing activities
activities that obtain from investors and creditors the cash needed to launch and sustain the business
investing activities
activities that increase or decrease the long-term assets available to the business
long-term debt
a liability that falls due beyond one year from the date of the financial statements
net earnings
another name for net income
net profit
another name for net income
operating activities
activities that create revenue or expense in the entity’s major line of business
statement of financial position
another name for the balance sheet
statement of operations
another name for the income statement
stock
shares into which the owners’ equity of a corporation is divided
