Chapter 1: The Financial Statements Flashcards
Financial Statements
Are the business documents that companies use to report the results of their activities to various user groups
Accounting
Is an information system that measures business activities, processes data into reports, and communicates results to decision makers
Why is accounting called the “language of business”?
Because it produces financial statements, which report information about a business entity. The financial statements measure performance and communicate where a business stands in financial terms
Why do individuals use accounting information?
Accounting provides the necessary information to allow individuals to make decisions regarding personal bank accounts, renting a house, and budgeting monthly income
Why do investors and creditors use accounting information?
Investors want to know how much income they can expect to earn on an investment and creditors want to know when a corporation is going to pay them back
Why do regulatory bodies use accounting information?
The IRS and various state and local governments require businesses to pay taxes. The SEC requires companies whose stock is traded publicly to provide periodic financial reports
Why do non-profit organizations use accounting information?
Churches, hospitals, and charities base many of their operating decisions on accounting data
Financial Accounting
Provides information for decision makers outside the organization such as investors, creditors, government agencies, and the public. Information must be relevant for decision makers and represented faithfully depicting the entity’s current economic activities.
Managerial Accounting
Provides information for managers. Includes budgets, forecasts, and projections that are used in making strategic decisions of the entity
Proprietorship
Has a single owner and tend to be small retail stores or solo providers of professional services.
Liability of a Proprietorship
The proprietor is personally liable for all of the business’s debts.
Should the business finances and personal finances be mixed?
No
Partnership
Has 2 or more parties called co-owners and each owner is a partner. Income and loss flow through to the partners and they recognize it based on their agreed upon percentage interest in the business
How do partnerships pay taxes?
Each partner takes a proportionate share of the entity’s taxable income and pays according to that partner’s individual or corporate rate
How are partnerships governed?
Partnerships are governed by a contract between the partners
Liability of Partnerships
Unlimited liability where any partner can conduct business in the name of the entity and can make agreements that legally bind all partners without limits for the partnership’s debts
Limited Liability Partnership
A partnership where a partner cannot create a large liability for the other partners
Liability of LLP
Each partner is liable for partnership debts up to the extent of their investment plus their proportionate share of the liabilities
What does a LLP need to have?
An LLP must have one general partner with unlimited liability for all partnership debts
Limited Liability Corporation
Is one of which where the business is liable for the company’s debts
What are owners of an LLC called?
Members
Liability of an LLC
Members of an LLC do not have unlimited liability for the LLC’s debt
Does an LLC pay income tax?
They pay no business income tax
How do members of an LLC pay income taxes?
The LLC’s income flows through to the members and they pay income tax at their own tax rates just as if they were partners