Chapter 1 - Notes Flashcards
Questions financial accounting asks (4)
- Should I invest in the business?
- Is the business profitable?
- Should we lend money to the business?
- Can the business pay us back?
Questions managerial accounting asks (3)
- How much money should the business budget for production?
- Should the business expand to a new location?
- How much do actual costs compare to budgeted costs?
Accounting questions asked by individuals (2)
- How much cash do you have?
2. How much do you need to save each month to retire at a certain age or pay for a college education?
Business owners use accounting information to: (3)
o Set goals
o Measure progress towards goals
o Make adjustments when needed
Financial statements are helpful when, for example, a business needs to know ________________
If it has enough money for new computers
Outside investors who have some ownership interest often ____________ to get a business going
provide the money
How might you decide if a business is a good investment?
You might try to predict the amount of income from the investment
After investment, a ________ show how the investment is doing
financial statement
Before extending credit to a business, a creditor evaluates the company’s ___(a)___ by evaluating ___(b)___
a. ability to pay
b. financial statements
Income tax is calculated using _________
accounting information
Good accounting records can help individuals and businesses take advantage of lawful _____________
deductions
Without good records, the IRS can disallow ___(a)___, resulting in a ___(b)___ plus ___(c)___
a. tax deductions
b. higher tax bill
c. interest and penalties
Requirements to be a CPA
- Requirements vary state to state
2. One must meet the education and/or experience requirements and pass a qualifying exam
Controller
Complie financial statements, interact with auditors, and oversee regulatory reporting
Financial Analysts
Review financial data and help to explain the story behind the numbers
Business Systems Analysts
Use accounting knowledge to create computer systems
Tax Accountants
Help companies navigate tax laws
Auditors
Perform reviews of companies to ensure compliance to rules and regulations
Cost Accountants
Typically work in a manufacturing business. Help analyze accounting data
Paraprofessional / Bookkeeper
Record financial transactions and help prepare financial records
Public accounting involves working for ______
a public accounting firm
Private accounting involves working for
a single company (ex Amazon)
Financial Accounting Standards Board (FASB) works with the ___(a)___ and ___(b)___ groups like the ___(c)___ and ___(d)___ groups like the ___(e)___, ___(f)___, and ___(g)____
a. SEC
b. congressionally created
c. Public Company Accounting Oversight Board (PCAOB)
d. private
e. American Institute of CPAs (AICPA)
f. Institute of Management Accountants (IMA)
g. Internal Accounting Standards Board (IASB)
Securities and Exchange Commission (SEC) is a US Governmental agency that oversees the ___(a)___. It also oversees those organizations that ___(b)___ like ___(c)___. It requires US businesses follow ___(d)___
a. US financial markets
b. sets standards
c. the FASB
d. US GAAP
GAAP rests on ___(a)___ that identifies the ___(b)___, ___(c)___, ___(d)___, and ___(e)___ of financial statements and creates ___(f)___
a. conceptual framework
b. objectives
c. characteristics
d. elements
e. implementation
f. acceptable accounting processes
The primary objective of financial reporting is to __________________
provide information useful for making investment and lending decisions
To be useful, information must have ___________
faithful representation
Relevant information allows users of the information to ______________
make a decision
Information that is faithfully representative is ___(a)___, ___(b)___, and ___(c)___
a. complete
b. neutra
c. free from error
We draw ___(a)___ around each entity to keep ___(b)___
a. boundaries
b. its affairs distinct from those of other entities
Entity refers to one ___(a)___, separate from its ___(b)___
a. business
b. owners
of Owners - Sole Proprietorship
1
of Owners - Partnership
2 or more (partners)
of Owners - Corporation
1 or more (stockholders)
of Owners - LLC
1 or more (members or partners)
Term - Sole Proprietorship
Terminates at owner’s choice or death
Term - Partnership
Terminate at a partner’s choice or death
Term - Corporation
Indefinite
Term - LLC
Indefinite
Liability of Owner(s) for the Debts of the Business - Sole Proprietorship
Owner is personally liable
Liability of Owner(s) for the Debts of the Business - Partnership
Partners are personally liable
Liability of Owner(s) for the Debts of the Business - Corporation
Stockholders are not personally liable
Liability of Owner(s) for the Debts of the Business - LLC
Members are not personally liable
Taxation - Sole Proprietorship
Not separate taxable entities. Owner pays tax on the business’ earnings
Taxation - Partnership
Partnership is not taxed, partners pay tax on their own part of the earnings
Taxation - Corporation
Separate taxable entity. Corporation pays taxes
Taxation - LLC
LLC is not taxed, instead members pay tax on their share of earnings
Type of Business - Sole Proprietorship
Small business
Type of Business - Partnership
Professional organizations (physicians, attorneys, and accountants)
Type of Business - LLC
Professional organizations (physicians, attorneys, and accountants) - alternative to the partnership
Type of Business - Corporation
From small business to large multinational businesses
A corporation is an entity that exists separate from its ___(a)___ who are called ___(b)___ or ___(c)___
a. owners
b. stockholders
c. shareholders
The corporation has many of the rights that a ______ has
person
Examples of a rights a corporation has like a person (4)
- buy, sell, and own property
- enter into contracts
- sue
- be sued
Items that the business owns (its ___(a)___) and those items that the business has to pay later (its ___(b)___) belong to the ___(c)___ and not to the ___(d)___
a. assets
b. liabilities
c. corporation
d. individual stockholders
Stockholder
A person who owns stock in a corporation
Ownership interest of a corporation is divided into ___(a)___ or ___(b)___
a. shares
b. stock
A person becomes a stockholder by __________
purchasing stock of the corporation
The corporate ___(a)___ specifies how much stock the corporation is authorized to issue (sell) to the ___(b)___. Due to this it is usually easier for corporations to ___(c)___
a. charter
b. public
c. raise capital
Continuous Life and Transferability of Ownership
Stockholders may transfer stock as they wish by selling or trading the stock to another person, giving the stock away, bequesting it in a will, or disposing of the stock in any other way
Because corporations have ___(a)___ lives regardless of changes in the ___(b)___, the ___(c)___ has no effect on the ___(d)___ of the corporation. A corporation’s life is not dependent on a ___(e)___
a. continuous
b. ownership of their stock
c. transfer of stock
d. continuity
e. specific individual’s ownership
No Mutual Agency
means that the stockholder of a corporation cannot commit the corporation to a contract unless that stockholder is acting in a different role, such as an officer in the business
Mutual agency of the owners is not present in a ___(a)___ as it is in a ___(b)___
a. corporation
b. partnership
Limited Liability of Stockholder
a stockholder has limited liability for the corporation’s debts
The most that stockholders can lose is ____________
the amount they originally paid for the stock
The combination of limited liability and no mutual agency means that a person can ___(a)___ with only the fear of ___(b)___ if the business fails. This attractive feature enables a corporation to ___(c)___ than ___(d)___ and ___(e)___
a. invest unlimited amounts in a corporation
b. losing whatever amount the individual has invested
c. raise more money
d. proprietorships
e. partnerships
Separation of Ownership and Management
Stockholders own the business, but a board of directors – elected by the stockholders – appoints corporate officers to manage the business. Thus, stockholders do not have to disrupt their personal affairs to manage the business
The separation between stockholders and management may create problems: (2)
- Corporate officers may decide to run the business for their own benefit rather than for the benefit of the company.
- Stockholders may find it difficult to lodge an effective protest against management because of the difference between them and the top managers
Corporate Taxation
Corporations are separate taxable entities. They pay a variety of taxes not paid by sole proprietorships or partnerships
Depending on the state in which the corporation incorporated and the states in which the corporation operates, the taxes could include one or both of the following
- Federal and State Income Taxes
2. Annual Franchise Tax Levied by the State
Federal and State Income Taxes (corporation)
Corporate taxes are subject to double taxation. First, corporations pay their own income tax on corporate income. Second, the stockholders pay personal income tax on the dividends that they receive from corporations.
Federal and State Income Taxes for a corporation are different from sole proprietorships and partnerships, which ___(a)___. Instead, the tax falls solely on ___(b)___
a. pay no business income tax
b. individual owners
Annual Franchise Tax Levied by the State (corporation)
the franchise tax is paid to keep the corporation charter in force and enables the corporation to continue in business
Corporations are subjected to more ___(a)___ than other forms of business, which is a ___(b)___ for corporations and can be ___(c)___
a. governmental regulation
b. disadvantage
c. expensive
____(a)___ begin the creation of the corporation by ____(b)____
a. Incorporators
b. obtaining a charter from the state
The charter includes the authorization for the corporation to ___(a)___, which represent the ___(b)___
a. issue a certain number of stocks
b. ownership in the corporation
Regarding the charter, the incorporators ___(a)___, ___(b)___, and ___(c)___
a. pay fees
b. sign the charter
c. file the required documents with the state
Bylaws
rule book that guides the corporation
___(a)___ agree to a set of bylaws, which act as the ___(b)___ for ___(c)___ the corporation
a. incorporators
b. constitution
c. governing
Once _______, the corporation comes into existence
the first share of stock is issued
The ultimate control of the corporation rests with ___(a)___, who normally receive ___(b)___ for each ___(c)___
a. the stockholders
b. one vote
c. share of stock they own
The stockholders elect ___(a)___, which ___(b)___ and ___(c)___
a. the members of the board of directors
b. sets policy for the corporation
c. appoints the officers
The board elects a ______, who usually is the most powerful person in the corporation
chairperson
The board also designates the ______, who as chief executive officer manages day-to-day operations
president
Most corporations also have ______ in charge of sales, operations, accounting and finance, and other key areas
vice presidents
A cost principle is also called a __________
historical cost
The cost principle means we record a transaction at the ___(a)___ (the ___(b)___)
a. amount shown on the receipt
b. actual amount paid
With the cost principle, even though the purchaser may believe the price is a ___(a)___, the item is recorded at ___(b)___ and not at the ___(c)___ cost
a. bargain
b. the price actually paid
c. “expected”
Cost principle holds that accounting records should continue reporting the ___(a)___ of an asset over ___(b)___ because cost is a ___(c)___
a. historical cost
b. its useful life
c. reliable measure
Going Concern Assumption is another reason of measuring ______
assets at historical cost
Going Concern Assumption assumes businesses will ___(a)___ long enough to ___(b)___ for their ___(c)___
a. remain in operation
b. use the existing resources
c. intended purposes
with Monetary Unit Assumption, accountants assume that the dollar’s ___(a)___ is ___(b)___
a. purchasing power
b. stable
Inflation
a rise in the price level as the value of a dollar changes over time
Companies who are incorporated in or do significant business is in another country might be required to publish financial statements using ______
International Financial Reporting Standards (IFRS)
International Financial Reporting Standards (IFRS) are generally ___(a)___ and based more on ___(b)___ than US GAAP
a. less specific
b. principle
Financial statements published by IFRS are published by the ______
IASB
International Financial Reporting Standards (IFRS) leaves more room for _______
professional judgment
SEC does not endorse ___(a)___ and is currently considering whether ___(b)___ is achievable
a. IFRS
b. a single set of global accounting standards
What are the opposing viewpoints in ethical considerations for accounting and business (2)
- Investors and creditors need relevant and faithfully representative information about a company that they are investing in or lending money to
- Companies want to be profitable and financially strong to attract investors and attempt to present their financial statements in a manner that portrays the business in the best possible way
Opposing viewpoints in ethical considerations for accounting and business can cause ______
conflicts of interest
Audit
an examination of a company’s financial statements and records
Sarbanes-Oxley Act (SOX) was created in response to ___(a)___ and is intended to ___(b)___
a. the Enron and WorldCom scandals
b. curb financial scandals
The Sarbanes-Oxley Act (SOX) makes it a criminal offense to ______
falsify financial statements
The Sarbanes-Oxley Act (SOX) created a new watchdog agency, ___(a)___, to monitor the ___(b)___ who ___(c)___
a. the Public Company Accounting Oversight Board (PCAOB)
b. work of independent accountants
c. audit public companies
Basic Accounting Equation
Assets = Liabilities + Equities
Assets
economic resources that are expected to benefit the business in the future. Something the business owns or has control
Assets are something of value that the business owns or has control of, for example ___(a)___, ___(b)___, ___(c)___, and ___(d)___
a. cash
b. merchandise inventory
c. furniture
d. land
Claims to assets come from two sources: ___(a)___ and ___(b)___
a. liabilities
b. equities
Liabilities
debts that are owed to creditors
Liabilities are something the business ___(a)___ and represent the creditors’ ___(b)___
a. owes
b. claims on the business’s assets
A creditor who has loaned money to a business has a ___(a)___ until ___(b)___
a. claim to some of the business’s assets
b. the business pays the debt
Many liabilities have the word ______ in their titles,
payable
Equity
The owners’ claims to the assets of the business
Equity is also called ______
stockholders equity
Equity represents the amount of ___(a)___ that are left over after the company has ___(b)___; it is the company’s ___(c)___
a. assets
b. paid its liabilities
c. net worth
Equity increases with ___(a)___ and ___(b)___
a. owner contributions
b. revenues
Contributed Capital
owner contributions to a corporation
A stockholder can contribute ___(a)___ or ___(b)___ (such as ___(c)___) to the business and receive ___(d)___
a. cash
b. other assets
c. equipment
d. capital
Revenues
amounts earned from delivering goods or services to customers
Revenues ______ equity
increase
Equity decreases with ___(a)___ and ___(b)___
a. expenses
b. distributions to owners
Expenses
the costs of selling goods or services
Expenses are the opposite of ___(a)___ and, therefore, ___(b)___ equity
a. revenues
b. decrease
Dividend
a distribution of a corporation’s earnings to stockholders
Dividends can be paid in the form of ___(a)___, ___(b)___, or ___(c)___
a. cash
b. stock
c. other property
Dividends are not ______
expenses
A corporation may or may not make ______ payments to the stockholders
dividend
Dividends are the opposite of ___(a)___ and therefore ___(b)___ equity
a. owner contributions
b. decrease
Equity consists of two main components:
1.
2.
- Contributed capital
2. Retained earnings
Contributed Capital
the amount contributed to the corporation by its owners (the stockholders. Also called paid-in capital
Contributed capital is also called ______
paid-in capital
The basic element of contributed capital is ___(a)___, which the corporation issues to the ___(b)___ as evidence of their ___(c)___
a. stock
b. stockholders
c. ownership
Common Stock
represents the basic ownership of a corporation
Retained Earnings
equity earned by profitable operations of a corporation that is not distributed to stockholders
Three types of events that affect retained earnings:
1.
2.
3.
- Dividends
- Revenues
- Expenses
Dividends represent ___(a)___ in retained earnings through the ___(b)___ of cash, stock, or other property to ___(c)___
a. decreases
b. distribution
c. stockholders
Revenues represent ___(a)___ in retained earnings from ___(b)___ to customers. They are ___(c)___.
a. increases
b. delivered goods or services
c. earnings
Expenses represent ___(a)___ in retained earnings that result from ___(b)___
a. decreases
b. operations
Net Income
The result of operations that occurs when total revenues are greater than total expenses
Businesses strive for ______
net income
When ___(a)___ are greater than ___(b)___, the result of operations is a ___(c)___, or net income
a. revenues
b. expenses
c. profit
Net Loss
the result of operations that occurs when total expenses are greater than total revenues
When ___(a)___ are greater than ___(b)___, the result is a net loss
a. expenses
b. revenues
Transaction
An event that effects the financial position of the business and can be measured with faithful representation
Accounting is based on actual ______
transactions
Transactions will affect the company’s ___(a)___, ___(b)___, and/or it’s ___(c)___
a. assets
b. liabilities
c. net worth (equity)
Many events affect a company, including economic booms and recessions. Accountants ___(a)___ record the effects of those events. An accountant records only events that ___(b)___, such as ___(c)___, ___(d)___, and ___(e)___.
a. do not
b. have dollar amounts that can be measured reliably
c. purchase of a building
d. sale of merchandise
e. the payment of rent
Steps in analyzing a transaction
1.
2.
3.
- Identify the accounts and the account type
- Decide if each account increases or decreases
- Determine if the accounting equation is in balance
Each transaction must affect at least ___(a)___ accounts but could affect ___(b)___
a. 2
b. more than 2
Items such as office supplies are an ___(a)___, not an ___(b)___ because ___(c)___. Office supplies aren’t ___(d)___, but will be ___(e)___
a. asset
b. expense
c. the supplies are something of value that the company had
d. used up immediately
e. in the future
Purchasing office supplies “on account” is ___(a)___, which is a ___(b)___ that will be paid in the future
a. an accounts payable
b. short-term liability
A payable is always a ______
liability
When deciding if each account in a transaction increases or decreases, remember to look at this from the ___(a)___ perspective, not from the ___(b)___ or ____(c)___ perspective
a. business’s
b. stockholders’
c. customers’
Cash Increases
The business has more cash than it had before
Common Stock Increases
the business received a contribution and issued stock
For each transaction, the amount on the ___(a)___ must equal the ___(b)___
a. left side of the equation
b. amount on the right side
Accounts Receivable
The right to receive cash in the future from customers for goods sold or for services performed
A promise to pay is a/an ___(a)___, a/an ___(b)___, because ___(c)___
a. asset
b. Accounts Receivable
c. the business expects to collect the cash in the future
The term on an account can be used to represent either ___(a)___ or ___(b)___. If the business will be receiving cash in the future, the company will record a/an ___(c)___. If the business will be paying cash in the future, the company will record a/an ___(d)___
a. Accounts Receivable
b. Accounts Payable
c. Accounts Receivable
d. Accounts Payable
Financial Statements
business documents that are used to communicate information needed to make business decisions
Types of Financial Statements 1. 2. 3. 4.
- Income Statement
- Statement of Retained Earnings
- Balance Sheet
- Statement of Cash Flows
Income Statement
Reports the net income or net loss of the business for a specific period
An income statement provides information about ___(a)___ for ___(b)___
a. profitability
b. a particular period for the company
Net income means ___(a)___ are greater than ___(b)___
a. total revenues
b. total expenses
Net loss means ___(a)___ are greater than ___(b)___
a. total expenses
b. total revenues
The only two types of accounts that are reported on the income statement are ___(a)___ and ___(b)___
a. revenues
b. expenses
Income statements are prepared by:
Revenues – Expenses = Net Income or Net Loss
Statement of Retained Earnings
Reports how the company’s retained earning balance changed from the beginning to the end to the period
A ______ informs users about how much of the earnings were kept and reinvested in the company
statement of retained earnings
Net income used on the ___(a)___ is the net income that was calculated on the ___(b)___
a. statement of retained earnings
b. income statement
The main reason why the income statement is prepared before the statement of retained earnings is because ______ from the income statement is used on the statement of retained earnings
the net income
The net income or net loss must first be calculated on the ___(a)___ then carried to the ___(b)___
a. income statement
b. statement of retained earnings
The Statement of Retained Earnings is prepared by: ______
Retained earnings, Beginning [+ Net Income or – Net Loss for the period] – Dividends for the period = Retained Earnings, Ending
Balance Sheet
Reports on the assets, liabilities, and stockholders’ equity of the business as of a specific date
The balance sheet provides valuable information to ___(a)___ users about ___(b)___ as well as ___(c)___
a. financial statement
b. economic resources the company has (assets)
c. debts the company owes (liabilities)
The balance sheet is a ___(a)___ of the entity. An investor or creditor can quickly assess the ___(b)___ of a business by viewing the balance sheet
a. snapshot
b. overall health
The ______ allows decision makers to determine their opinion about the financial position of the company
balance sheet
The balance sheet is prepared by: ______
Assets = Liabilities + Stockholders’ Equity
Statement of Cash Flows
Reports on a business’s cash receipts and cash payments for a period of time
The statement of cash flows reports on ___(a)___ and ___(b)___ during a ___(c)___
a. the cash coming in (positive amounts)
b. the cash going out (negative amounts)
period
The statement of cash flows only reports transactions that involve ___(a)___ because it reports ___(b)___ in ___(c)___ during the period and the ___(d)___
a. cash
b. the net income increase or decrease
c. cash
d. ending cash balance
If a transaction does not involve cash, such as the purchase of supplies on an account, it will not be reported on the ______
statement of cash flows
The statement of cash flows is divided into three distinct sections:
1.
2.
3.
a. Operating
2. Investing
3. Financing
Operating section of statement of cash flows
involve cash receipts for services and cash payments for expenses
Investing section of statement of cashflows
include the purchase and sale of land and equipment for cash
Investing section of statement of cashflows
include the purchase and sale of land and equipment for cash
Financing section of statement of cash flows
include cash contributions by stockholders and cash dividends paid to the stockholders
A statement of cash flows is prepared by:
1.
2.
3.
- Cash flows from operating activities
- Cash flows from investing activities
- Cash flows from financing activities
When you are preparing the financial statements, start by identifying ___(a)___. Each ___(b)___ will only go on ___(c)___, except for ___(d)___ and ___(e)___.
a. which account goes on which statement
b. account
c. one statement
d. Retained Earnings
e. cash
___(a)___, such as ___(b)___, are only reported on the balance sheet
a. Liabilities
b. Accounts Payable
Cash and Retained Earnings appear on ______ statements
2
Return on Assets (ROA)
Measures how profitably a company uses its assets. Net Income / Average Total Assets
Return on assets is one of the many tools that users of ___(a)___ can use to determine ___(b)___
a. financial statements
b. how well a company is performing
Return on assets is calculated by dividing ___(a)___ by average ___(b)___
a. net income
b. total assets
Average total assets is calculated by adding ___(a)___ for the time period and dividing by ___(b)___
a. the beginning and ending total assets
b. 2
