Chapter 3.1: Financial Stataements Flashcards
A _______________ is an individual owner of their business and they ______________ separate business from personal
Sole proprietorship
Cannot
For a sole proprietorship, the liability is __________, meaning?
Unlimited
The owner is personally liable for all debts incurred by the proprietorship
With a sole proprietorship, can creditors go after personal assets?
Oh yes they can!
As business is personal is not separate
With a sole proprietorship, __________ and ___________ are part of an owners taxable situation
Profits and losses
With a sole proprietorship, they must report business income on their ________________
Personal tax returns
Sole proprietorship does not file its taxes separately from the principal
A _______________ has 2+ partners and you cannot seperate business and personal
General partnership (GP)
Liability in a general partnership is ____________, and how do creditors come after your assets?
Unlimited
Creditors can go after personal assets; each general partner becomes personally liable for all general partners debts
How do partnerships file their taxes?
Each partner must claim income / loss on their personal income tax
They must report their income on their personal tax returns
The general partnership itself isn’t subject to income tax
A _____________ is made up of general and limited partners. And the limited partners have no right to take part in _________________________________. It’s the _________________ who run the business
Limited partnership
Day to day operations
General partners
In a limited partnership (LP), there has to be 1+ ___________ and 1+ _______________.
Neither party can separate business and personal for assets
General partner
Limited partner
The liability in a limited partnership is __________ for the general partner and ____________ for the limited partner
Unlimited - creditors can go after personal assets
Limited - liability limited to their investment
(Have no right to take part in day to day operation)
How does taxes work on a limited partnership
All partners claim income / loss according to their share in the company
Partners have the same income tax status
LP itself is not subject to income tax
A ___________ never dies
Corporation
A corporation exists until it’s terminated by an act of ________________
All shareholders
A corporation is a _____________, meaning it has seperate legal entity
Legal fiction
Or fictional person
With a corporation, _________ are limited to their own equity
Shareholders
In a corporation, who manages the company?
The board of directors!
Not the shareholders silly
Liability of a corporation is limited to just the __________. Also, a coronation can _____ or be _______
Corporation
Sue or be sued
Individuals who acquire shares in a company do not own the ________ of the company
Assets
Imagine owning apple headquarters , wow
Corporations are ________________. And it has its own ____________, this mean it is subject to _______________
Taxable entities
Income status
Income tax
PREC STAND FOR WHAT?
Personal real estate corporation
What is the main purpose of a personal real estate corporation (PREC)
Income / tax planning
One benefit to a PREC is _______________, meaning it has business accounting / expenses
Business taxation
Another benefit to PREC’s is ________________, meaning non-voting shares can go to the spouse and children, reducing taxes payable
Income splitting
Another benefit to PREC’s is ____________, meaning income may be retained in the corporation, with personal taxes only paid once __________ are distributed
Tax deferral
Dividends
The last benefit to a PREC is _________________ for corporations
Low tax rates
A PREC protects personal assets BUT the _________________________ for actions related to provisions of real estate services
Licensee remains personally liable
What are some costs associated with a PREC
- accounting cost for both establishing and maintain a PREC
- requires double the real estate licensing fee
- requires double the errors and omissions insurance a
Difference between public and private corporation
Whether or not the shares are traded on stock market
When doing business with a corporation, you can conduct a corporate search to find out 6 things, which are
1) status
2) address
3) incorporation (recognition) date
4) previous company names
5) names of registered directors / officers
6) when last annual report was filed
Corporate search: status
Whether it’s active or inactive
Or if it has been involuntarily dissolved
Corporate search: incorporation (recognition) date
When the corporation was registered (aka started)
Corporate search: when the last annual report was filed
Whether the corporation is in good standing (filed its annual returns)
What are the 6 accounting principles
1) cost principle (aka historic cost)
2) revenue recognition
3) matching principle
4) objectivity principle
5) consistency principle
6) materiality principle
Cost principle (aka historic cost principle)
Record the amount paid for an asset
Easy: what you paid for, at the time of purchase)
Example of cost / historic cost principle
Joe buys a car for his real estate business. What amount should be recorded in his firms accounts?
1) ICBC insurable value is $60,000
2) list price was $68,000
3) joe negotiated and paid $62,000
4) the cars market value is appraised at $63,000
3) Joe negotiated and paid $62,000
Keyword: PAID
Revenue recognition principle is what?
Revenue should be recognized (put into the books) when earned, not necessarily when received
Example of revenue recognition principle
Joe has helped sell a property and gets a $10,000 commission check
1) December 1, 2021: subject clauses removed and deposit paid
2) January 15th, 2022: completion date (money is paid)
Are taxes payable in 2021 or 2022 
2021 - as this was the time the money was earned and not paid
Matching principle
Expenses should be recognized and deducted in the same period as the revenues they generated
Recognized when incurred, not necessarily when paid
Objectivity principle
All amounts must be objective and verifiable (example: by a third party)
The objectivity principle is closely aligned to the ___________ because the best way to ensure objectivity in accounting transactions is to record the amount of consideration given up at the date of transaction
Cost principle
Consistency principle
Once a principle is adopted, it should be used in future years
Consistency principle: The changes to accounting principles should only be made or the change result in providing more __________ and ___________ information to the user of the financial statements
Relevant and useful
Materiality principle
Is an exception to the matching principal.
The financial reports only have to include information that will be significant (material) to the users
The ____________ can never be changed at will
Fiscal year
_________________ could be changed but the tax year cannot be longer than _____ weeks
Corporation tax year
53
Balance sheet
Listing of the assets, liabilities, and owners equity of a business at a specific point in time
Assets are things that you _____
Own!!
Examples of assets you will see on a financial statement balance sheet
Current: Cash, account receivable (AR) Pre-paid expenses Inventories
Non-current:
Cars
Land
Buildings
A ______________ is one that will be used within a year
Current asset
A ______________ will take more than 1 years
Non current asset
Stays on books for more than a year
Liabilities are things that you ______
Owe!
Examples of liabilities
Current:
Credit card payable, accounts payable, wages payable taxes, tenant deposits
Non-current liability
Car loan payable, mortgages
Hint- payable
Current assets are things that will ________________
paid off in 1 year
Non current liabilities are things that will take more than __________ ____
1 year to pay off
And with assets and liabilities, don’t forget ____________
Owners equity
No ______________ will be shown on a corporation
Shareholders names
Hint to remember the 3 components on a balance sheet
BAL!
Balance sheet = assets - liabilities
Formula 1: ALOE
Assets = liabilities + owners equity
Formula 2: shareholders equity =
Shareholder equity = share capital + retained earnings
Income statement definition
Listing of revenue and expenses of a business for a given period
Acronym for the income statement
RENI!
Revenue - expenses = net income
In the statement of cash flows, changes in depreciation expense be recorded under ___________
Operating activities
Examples of revenues
Sales, commissions, interest, service, rent revenue
Examples of expenses
Cost of production Operation expenses Interest payment Income taxes Car - depreciation
Straight Line depreciation is not _________________
Tax deductible
You cannot deduct this from income
2 types of depreciation expense
1) straight like depreciation
2) CCA
Straight line depreciation formula
Annual depreciation = (cost - salvage value) / estimated life
Straight line depreciation example
Car cost = $20,000
Economic life = 10 years
Salvage value: $2,000
So ($20,000-2,000) / 10
= 1,800
Depreciation expense
Method used to allocate the cost of asset over time
Important: ________ never depreciates!!
LAND
LAND
LAND LAND
CCA is considered _____________
Tax deductible
Meaning you can deduct it from your income
CCA, rule 1, first year
1st year rule: only 1/2 available CCA% can be deducted in the 1st year
CCA last year rule
Last year rule: nothing can be deducted!!
0% whore
CCA example - class 10 car (30% CCA)
Undepreciated capital cost = 20,000
1st year: 20,000 x 0.15
=3,000
20,000-3000= 17,000
2nd year: 17,000 x 0.3
=5,100
17,000-5100= 11,900
3rd year: 11,900 x 0.3
= 3,570
11,900 - 3,570 = 8,330
Book value
Original cost of your asset minus depreciation to date
True or false… A sole proprietorship does not file its taxes separately from the principal
True!!
True or false… A sole proprietorship is the least common small business ownership model in service industries and has a lifespan that can exceed that of its owner
False!!
True or false… Limited partners have liability to creditors which is limited to the amount of money that they have invested in the business
Yes sir! They can only lose what they put in
True or false… Limited partners can be actively engaged in managing the business without any consequences to their partnership status
False!!
They cannot do any day to day operations
True or false… To conform to the cost principle, it is important to record the asset at what might be considered its fair market value instead of what the enterprise paid for it
False!!
True or false… The matching principle requires that expenses are always recorded when they are paid, which is not necessarily when they were incurred
False!!
True or false… The revenue recognition principle states that a business enterprise should recognize revenue when it is earned, not necessarily when the cash is actually received
True!!
Which of the following items will not be found on the balance sheet of a corporation
The names of the corporation shareholders
On the balance sheet inventories would be classified under
Current assets
What are the following is a liability on the financial statement
1) depreciation expense
2) accumulated depreciation
3) salaries payable
4) both 1+2
Salaries payABLE
True or false… The materiality principal is the same as the matching principal where purchasers with relatively low cost such as a stationary or cleaning supplies may be added to the books when paid for
False!
They opposites , not the same
Current assets on the financial statements of a business include
Rents receivable
A company has just bought a truck for $22,500. It is expected that the truck can be sold for $3000, 15 years from now. The current market value of the vehicle is $27,000. Using the straight-line method, what is the annual depreciation expense?
22,500 - 3000 = 19,500 / 15
= $1,300
What should the following statements regarding capital cost allowances false
The maximum CCA in a given year is equal to the depreciation expense multiplied by the CCA percentage
ABC Inc. paid $155,000 for an asset on which the income tax act allows capital cost allowance. The asset was purchased five years ago, and will be disposed at the end of this year. How much CCA will be claimed by ABC Inc. at the end of this year?
$0!
Last year rule = 0 depreciation fool
