Chapter 3.1: Financial Stataements Flashcards by Richie Sakhon

A _______________ is an individual owner of their business and they ______________ separate business from personal

Sole proprietorship

Cannot

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For a sole proprietorship, the liability is __________, meaning?

Unlimited

The owner is personally liable for all debts incurred by the proprietorship

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With a sole proprietorship, can creditors go after personal assets?

Oh yes they can!

As business is personal is not separate

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With a sole proprietorship, __________ and ___________ are part of an owners taxable situation

Profits and losses

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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

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A _______________ has 2+ partners and you cannot seperate business and personal

General partnership (GP)

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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

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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

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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

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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

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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)

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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

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A ___________ never dies

Corporation

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A corporation exists until it’s terminated by an act by ________________

All shareholders

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A corporation is a _____________, meaning it is a seperate legal entity

Legal fiction

Or fictional person

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With a corporation, _________ are limited to their own equity

Shareholders

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In a corporation, who manages the company?

The board of directors!

Not the shareholders silly

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Liability of a corporation is limited to just the __________. Also, a corporation can sue or be _______

Corporation

Sued

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Individuals who acquire shares in a company do not own the ________ of the company

Assets

Imagine owning apple headquarters , wow

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Corporations are ______ And it has its own income status this mean it is subject to _______________

Taxable entities

Income tax

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PREC STAND FOR WHAT?

Personal real estate corporation

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What is the main purpose of a personal real estate corporation (PREC)

Income / tax planning

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One benefit to a PREC is _______________, meaning it has business accounting / expenses

Business taxation

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Another benefit to PREC’s is ________________, meaning non-voting shares can go to the spouse and children, reducing taxes payable

Income splitting

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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 ______ is low tax rates for corporations

PREC (Personal Real Estate Corporation)

A PREC protects personal assets BUT the ________ remains personally liable for actions related to provisions of real estate services

Licensee

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

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

Purpose of a Corporate search: status

Determine 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)

Purpose of a Corporate search: when the last annual report was filed

Determine 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 (hint in taxation)

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 ______ asset is one that will be payed within a year

Current

A ______________ will take more than 1 years

Non current asset Stays on books for more than a year

_____ are things that you owe

Liabilities

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%

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!!

On the balance sheet inventories would be classified under

Current assets

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

Rents receivable are listed as ________ on the financial statements of a business

Current assets

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

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