Chapter 1 - Notes Flashcards
1
Q
Questions financial accounting asks (4)
A
- Should I invest in the business?
- Is the business profitable?
- Should we lend money to the business?
- Can the business pay us back?
2
Q
Questions managerial accounting asks (3)
A
- 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?
3
Q
Accounting questions asked by individuals (2)
A
- 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?
4
Q
Business owners use accounting information to: (3)
A
o Set goals
o Measure progress towards goals
o Make adjustments when needed
5
Q
Financial statements are helpful when, for example, a business needs to know ________________
A
If it has enough money for new computers
6
Q
Outside investors who have some ownership interest often ____________ to get a business going
A
provide the money
7
Q
How might you decide if a business is a good investment?
A
You might try to predict the amount of income from the investment
8
Q
After investment, a ________ show how the investment is doing
A
financial statement
9
Q
Before extending credit to a business, a creditor evaluates the company’s ___(a)___ by evaluating ___(b)___
A
a. ability to pay
b. financial statements
10
Q
Income tax is calculated using _________
A
accounting information
11
Q
Good accounting records can help individuals and businesses take advantage of lawful _____________
A
deductions
12
Q
Without good records, the IRS can disallow ___(a)___, resulting in a ___(b)___ plus ___(c)___
A
a. tax deductions
b. higher tax bill
c. interest and penalties
13
Q
Requirements to be a CPA
A
- Requirements vary state to state
2. One must meet the education and/or experience requirements and pass a qualifying exam
14
Q
Controller
A
Complie financial statements, interact with auditors, and oversee regulatory reporting
15
Q
Financial Analysts
A
Review financial data and help to explain the story behind the numbers
16
Q
Business Systems Analysts
A
Use accounting knowledge to create computer systems
17
Q
Tax Accountants
A
Help companies navigate tax laws
18
Q
Auditors
A
Perform reviews of companies to ensure compliance to rules and regulations
19
Q
Cost Accountants
A
Typically work in a manufacturing business. Help analyze accounting data
20
Q
Paraprofessional / Bookkeeper
A
Record financial transactions and help prepare financial records
21
Q
Public accounting involves working for ______
A
a public accounting firm
22
Q
Private accounting involves working for
A
a single company (ex Amazon)
23
Q
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
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)
24
Q
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
a. US financial markets
b. sets standards
c. the FASB
d. US GAAP
25
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
26
The primary objective of financial reporting is to __________________
provide information useful for making investment and lending decisions
27
To be useful, information must have ___________
faithful representation
28
Relevant information allows users of the information to ______________
make a decision
29
Information that is faithfully representative is ___(a)___, ___(b)___, and ___(c)___
a. complete
b. neutra
c. free from error
30
We draw ___(a)___ around each entity to keep ___(b)___
a. boundaries
| b. its affairs distinct from those of other entities
31
Entity refers to one ___(a)___, separate from its ___(b)___
a. business
| b. owners
32
of Owners - Sole Proprietorship
1
33
of Owners - Partnership
2 or more (partners)
34
of Owners - Corporation
1 or more (stockholders)
35
of Owners - LLC
1 or more (members or partners)
36
Term - Sole Proprietorship
Terminates at owner’s choice or death
37
Term - Partnership
Terminate at a partner’s choice or death
38
Term - Corporation
Indefinite
39
Term - LLC
Indefinite
40
Liability of Owner(s) for the Debts of the Business - Sole Proprietorship
Owner is personally liable
41
Liability of Owner(s) for the Debts of the Business - Partnership
Partners are personally liable
42
Liability of Owner(s) for the Debts of the Business - Corporation
Stockholders are not personally liable
43
Liability of Owner(s) for the Debts of the Business - LLC
Members are not personally liable
44
Taxation - Sole Proprietorship
Not separate taxable entities. Owner pays tax on the business’ earnings
45
Taxation - Partnership
Partnership is not taxed, partners pay tax on their own part of the earnings
46
Taxation - Corporation
Separate taxable entity. Corporation pays taxes
47
Taxation - LLC
LLC is not taxed, instead members pay tax on their share of earnings
48
Type of Business - Sole Proprietorship
Small business
49
Type of Business - Partnership
Professional organizations (physicians, attorneys, and accountants)
50
Type of Business - LLC
Professional organizations (physicians, attorneys, and accountants) - alternative to the partnership
51
Type of Business - Corporation
From small business to large multinational businesses
52
A corporation is an entity that exists separate from its ___(a)___ who are called ___(b)___ or ___(c)___
a. owners
b. stockholders
c. shareholders
53
The corporation has many of the rights that a ______ has
person
54
Examples of a rights a corporation has like a person (4)
1. buy, sell, and own property
2. enter into contracts
3. sue
4. be sued
55
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
56
Stockholder
A person who owns stock in a corporation
57
Ownership interest of a corporation is divided into ___(a)___ or ___(b)___
a. shares
| b. stock
58
A person becomes a stockholder by __________
purchasing stock of the corporation
59
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
60
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
61
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
62
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
63
Mutual agency of the owners is not present in a ___(a)___ as it is in a ___(b)___
a. corporation
| b. partnership
64
Limited Liability of Stockholder
a stockholder has limited liability for the corporation’s debts
65
The most that stockholders can lose is ____________
the amount they originally paid for the stock
66
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
67
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
68
The separation between stockholders and management may create problems: (2)
1. Corporate officers may decide to run the business for their own benefit rather than for the benefit of the company.
2. Stockholders may find it difficult to lodge an effective protest against management because of the difference between them and the top managers
69
Corporate Taxation
Corporations are separate taxable entities. They pay a variety of taxes not paid by sole proprietorships or partnerships
70
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
1. Federal and State Income Taxes
| 2. Annual Franchise Tax Levied by the State
71
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.
72
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
73
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
74
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
75
____(a)___ begin the creation of the corporation by ____(b)____
a. Incorporators
| b. obtaining a charter from the state
76
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
77
Regarding the charter, the incorporators ___(a)___, ___(b)___, and ___(c)___
a. pay fees
b. sign the charter
c. file the required documents with the state
78
Bylaws
rule book that guides the corporation
79
___(a)___ agree to a set of bylaws, which act as the ___(b)___ for ___(c)___ the corporation
a. incorporators
b. constitution
c. governing
80
Once _______, the corporation comes into existence
the first share of stock is issued
81
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
82
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
83
The board elects a ______, who usually is the most powerful person in the corporation
chairperson
84
The board also designates the ______, who as chief executive officer manages day-to-day operations
president
85
Most corporations also have ______ in charge of sales, operations, accounting and finance, and other key areas
vice presidents
86
A cost principle is also called a __________
historical cost
87
The cost principle means we record a transaction at the ___(a)___ (the ___(b)___)
a. amount shown on the receipt
| b. actual amount paid
88
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"
89
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
90
Going Concern Assumption is another reason of measuring ______
assets at historical cost
91
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
92
with Monetary Unit Assumption, accountants assume that the dollar's ___(a)___ is ___(b)___
a. purchasing power
| b. stable
93
Inflation
a rise in the price level as the value of a dollar changes over time
94
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)
95
International Financial Reporting Standards (IFRS) are generally ___(a)___ and based more on ___(b)___ than US GAAP
a. less specific
| b. principle
96
Financial statements published by IFRS are published by the ______
IASB
97
International Financial Reporting Standards (IFRS) leaves more room for _______
professional judgment
98
SEC does not endorse ___(a)___ and is currently considering whether ___(b)___ is achievable
a. IFRS
| b. a single set of global accounting standards
99
What are the opposing viewpoints in ethical considerations for accounting and business (2)
1. Investors and creditors need relevant and faithfully representative information about a company that they are investing in or lending money to
2. 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
100
Opposing viewpoints in ethical considerations for accounting and business can cause ______
conflicts of interest
101
Audit
an examination of a company’s financial statements and records
102
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
103
The Sarbanes-Oxley Act (SOX) makes it a criminal offense to ______
falsify financial statements
104
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
105
Basic Accounting Equation
Assets = Liabilities + Equities
106
Assets
economic resources that are expected to benefit the business in the future. Something the business owns or has control
107
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
108
Claims to assets come from two sources: ___(a)___ and ___(b)___
a. liabilities
| b. equities
109
Liabilities
debts that are owed to creditors
110
Liabilities are something the business ___(a)___ and represent the creditors’ ___(b)___
a. owes
| b. claims on the business’s assets
111
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
112
Many liabilities have the word ______ in their titles,
payable
113
Equity
The owners’ claims to the assets of the business
114
Equity is also called ______
stockholders equity
115
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
116
Equity increases with ___(a)___ and ___(b)___
a. owner contributions
| b. revenues
117
Contributed Capital
owner contributions to a corporation
118
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
119
Revenues
amounts earned from delivering goods or services to customers
120
Revenues ______ equity
increase
121
Equity decreases with ___(a)___ and ___(b)___
a. expenses
| b. distributions to owners
122
Expenses
the costs of selling goods or services
123
Expenses are the opposite of ___(a)___ and, therefore, ___(b)___ equity
a. revenues
| b. decrease
124
Dividend
a distribution of a corporation’s earnings to stockholders
125
Dividends can be paid in the form of ___(a)___, ___(b)___, or ___(c)___
a. cash
b. stock
c. other property
126
Dividends are not ______
expenses
127
A corporation may or may not make ______ payments to the stockholders
dividend
128
Dividends are the opposite of ___(a)___ and therefore ___(b)___ equity
a. owner contributions
| b. decrease
129
Equity consists of two main components:
1.
2.
1. Contributed capital
| 2. Retained earnings
130
Contributed Capital
the amount contributed to the corporation by its owners (the stockholders. Also called paid-in capital
131
Contributed capital is also called ______
paid-in capital
132
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
133
Common Stock
represents the basic ownership of a corporation
134
Retained Earnings
equity earned by profitable operations of a corporation that is not distributed to stockholders
135
Three types of events that affect retained earnings:
1.
2.
3.
1. Dividends
2. Revenues
3. Expenses
136
Dividends represent ___(a)___ in retained earnings through the ___(b)___ of cash, stock, or other property to ___(c)___
a. decreases
b. distribution
c. stockholders
137
Revenues represent ___(a)___ in retained earnings from ___(b)___ to customers. They are ___(c)___.
a. increases
b. delivered goods or services
c. earnings
138
Expenses represent ___(a)___ in retained earnings that result from ___(b)___
a. decreases
| b. operations
139
Net Income
The result of operations that occurs when total revenues are greater than total expenses
140
Businesses strive for ______
net income
141
When ___(a)___ are greater than ___(b)___, the result of operations is a ___(c)___, or net income
a. revenues
b. expenses
c. profit
142
Net Loss
the result of operations that occurs when total expenses are greater than total revenues
143
When ___(a)___ are greater than ___(b)___, the result is a net loss
a. expenses
| b. revenues
144
Transaction
An event that effects the financial position of the business and can be measured with faithful representation
145
Accounting is based on actual ______
transactions
146
Transactions will affect the company's ___(a)___, ___(b)___, and/or it's ___(c)___
a. assets
b. liabilities
c. net worth (equity)
147
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
148
Steps in analyzing a transaction
1.
2.
3.
1. Identify the accounts and the account type
2. Decide if each account increases or decreases
3. Determine if the accounting equation is in balance
149
Each transaction must affect at least ___(a)___ accounts but could affect ___(b)___
a. 2
| b. more than 2
150
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
151
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
152
A payable is always a ______
liability
153
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'
154
Cash Increases
The business has more cash than it had before
155
Common Stock Increases
the business received a contribution and issued stock
156
For each transaction, the amount on the ___(a)___ must equal the ___(b)___
a. left side of the equation
| b. amount on the right side
157
Accounts Receivable
The right to receive cash in the future from customers for goods sold or for services performed
158
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
159
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
160
Financial Statements
business documents that are used to communicate information needed to make business decisions
161
```
Types of Financial Statements
1.
2.
3.
4.
```
1. Income Statement
2. Statement of Retained Earnings
3. Balance Sheet
4. Statement of Cash Flows
162
Income Statement
Reports the net income or net loss of the business for a specific period
163
An income statement provides information about ___(a)___ for ___(b)___
a. profitability
| b. a particular period for the company
164
Net income means ___(a)___ are greater than ___(b)___
a. total revenues
| b. total expenses
165
Net loss means ___(a)___ are greater than ___(b)___
a. total expenses
| b. total revenues
166
The only two types of accounts that are reported on the income statement are ___(a)___ and ___(b)___
a. revenues
| b. expenses
167
Income statements are prepared by:
Revenues – Expenses = Net Income or Net Loss
168
Statement of Retained Earnings
Reports how the company’s retained earning balance changed from the beginning to the end to the period
169
A ______ informs users about how much of the earnings were kept and reinvested in the company
statement of retained earnings
170
Net income used on the ___(a)___ is the net income that was calculated on the ___(b)___
a. statement of retained earnings
| b. income statement
171
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
172
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
173
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
174
Balance Sheet
Reports on the assets, liabilities, and stockholders’ equity of the business as of a specific date
175
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)
176
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
177
The ______ allows decision makers to determine their opinion about the financial position of the company
balance sheet
178
The balance sheet is prepared by: ______
Assets = Liabilities + Stockholders’ Equity
179
Statement of Cash Flows
Reports on a business’s cash receipts and cash payments for a period of time
180
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
181
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
182
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
183
The statement of cash flows is divided into three distinct sections:
1.
2.
3.
a. Operating
2. Investing
3. Financing
184
Operating section of statement of cash flows
involve cash receipts for services and cash payments for expenses
185
Investing section of statement of cashflows
include the purchase and sale of land and equipment for cash
185
Investing section of statement of cashflows
include the purchase and sale of land and equipment for cash
186
Financing section of statement of cash flows
include cash contributions by stockholders and cash dividends paid to the stockholders
187
A statement of cash flows is prepared by:
1.
2.
3.
1. Cash flows from operating activities
2. Cash flows from investing activities
3. Cash flows from financing activities
188
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
189
___(a)___, such as ___(b)___, are only reported on the balance sheet
a. Liabilities
| b. Accounts Payable
190
Cash and Retained Earnings appear on ______ statements
2
191
Return on Assets (ROA)
Measures how profitably a company uses its assets. Net Income / Average Total Assets
192
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
193
Return on assets is calculated by dividing ___(a)___ by average ___(b)___
a. net income
| b. total assets
194
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
