Chapter 1: Introduction to Financial Statements Flashcards
Accounting
Preparing and communicating financial information to stakeholders (investors and creditors)
Internal Users
Managerial/Management
Finance
Marketing
Human Resources
External Users
Financial accounting (getting money from investors and creditors)
Taxing authorities
Present creditors
3 Forms of Business Organization
- Single Proprietorship
- Partnership
- Corporation
Single proprietorship
One owner easy to establish owner controlled tax advantage personal liability
Partnership
2 or more owners simple to establish shared control broader skills and resources tax advantages personal liability
Corporation
A business organized as a separate legal entity owned by stockholders.
Raises money by issuing shares of stock (common stock = portion of stockholders equity resulting from cash from investors)
easier to transfer ownership
easier to raise funds
no personal liability
reduced liability for investors
Accounting equation
Assets (stuff you own) = Liabilities (obligations, what you owe) + Stockholder’s Equity (common stock and retained earnings; revenue, expenses, and dividends)
Assets
1) Company controls it
2) Has future economic benefit
(Resources owned by a business)
3 Business activities
- Financing: Borrowing money (debt) or issuing stock
- Investing: Purchasing resources a company needs to operate, buying assets
- Operating: Once a business has the assets it needs, it can begin its operations
Dividends
Payments to stockholders/shareholders
Stockholders = Anyone with skin in the game
Preffered stock: Jr. Owners
Common stock holders: Have power
Creditors
Party to whom amounts are owed
Revenue
Amounts earned from sale of products and other sources
Has suffix “revenue”
Increases an asset (usually cash)
Liabilities
Accounts owed
Ex: Notes payable, rent payable, accounts payable, unearned revenue (received money for service that has not been done yet)
Inventory
Goods available for sale to customers
Accounts receivable
Right to receive money from customer as results of a sale
Money you receive
Current Asset
Accounts payable
Obligations to suppliers of goods
Money you owe to different suppliers
Liability
Expenses
The cost of assets consumed or services used in the process of generating revenues Spending money to make more money Dividends are NEVER an expense Has sufficient expense Ex: Rent expense
Net income/bottom line/earnings
When revenue > expenses
Net loss
Expenses > Revenue
Income Statement
A financial statement that reports a company's revenues and expenses and resulting net income or net loss for a specific period of time. Measures overall performance Net Income = Revenues - Expenses Most important Goes first
Retained Earnings Statement
A financial statement that summarizes the amounts and causes of changes in retained earnings for a specific time period
Retained Earnings = Revenues - Expenses - Dividends
(Net income - dividends)
Balance sheet
A financial statement that reports the assets and claims to those assets at a specific point in time.
Assets = Liabilities + Stockholder’s equity
ONE specific date
Statement of Cash Flow
A financial statement that provides financial information about the cash receipts and cash payments of a business for a specific period of time
Provides information on financing, investing, and operating activities
Equity statement
Stockholder’s equity: The owners’ claim to assets
Annual Report
A report prepared by corporate management that presents financial information including:
1) financial statements
2) management discussion and analysis section
3) notes
4) auditor’s report
Auditor’s report
A report prepared by an independent outside auditor stating the auditor’s opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with generally accepted accounting principles (GAAP)
Articulation
Connection between statements
Statements are articulated
Everything affects the balance sheet
Management discussion and analysis (MD&A)
A section of the annual report that presents management’s views on the company’s ability to pay near‐term obligations, its ability to fund operations and expansion, and its results of operations.
Notes (Disclosures)
Notes clarify information presented in the financial statements and provide additional detail
Essential to understanding company’s operating performance and financial position
International Financial Reporting Standards (IFRS)
Accounting standards, issued by the IASB, that have been adopted by many countries outside of the United States
Generally accepted accounting principles (GAAP)
A set of accounting standards that have substantial authoritative support and which guide accounting professionals.
Sarbanes‐Oxley Act (SOX)
Regulations passed by Congress to reduce unethical corporate behavior
1) Top management must certify accuracy of information
2) independence of auditors increased
3) Penalties for fraud increased
Taxes did not increase
Certified public accountant (CPA)
An individual who has met certain criteria and is thus allowed to perform audits of corporations
Common stock
Term used to describe the total amount paid in by stockholders for the shares they purchase
Retained earnings
The amount of net income retained in the corporation
Securities and Exchange Commission (SEC)
The agency of the U.S. government that oversees U.S. financial markets and accounting standard‐setting bodies
FTC
Federal Trade Commission (prevents monopolies)
IRS
International Revenue Service
Public Company Accounting Oversight Board (PCAOB)
The group charged with determining auditing standards and reviewing the performance of auditing firms
Control accounting rules
No more private accounting
Accountable to SEC
Financial Accounting Standards Board (FASB)
The primary accounting standard‐setting body in the United States
International Accounting Standards Board (IASB)
An accounting standard‐setting body that issues standards adopted by many countries outside of the United States.
