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ACCT 229 > chapter one notes > Flashcards

chapter one notes Flashcards

1
Q

sole proprietorship

A

one owner
(separate entity for accounting)
(not a separate entity for tax)

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2
Q

partnership

A

two or more owners
(separate entity for accounting)
(not a separate entity for tax)

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3
Q

corporation

A

many stockholders/shareholders

separate entity for accounting and tax

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4
Q

what are the advantages of a sole proprietorship?

A

easy to form

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5
Q

what are the disadvantages of a sole proprietorship?

A

“unlimited liability”

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6
Q

what are the disadvantages of a partnership?

A

“unlimited liability”

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7
Q

what are the advantages of a corporation?

A

limited liability
continuity of life
ease in transfer of ownership
opportunity to raise large capital through stock

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8
Q

what are the disadvantages of a corporation?

A

double taxation

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9
Q

double taxation

A

dividends are taxed on personal returns as well as on the corporation’s return

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10
Q

what are the three business activities?

A

financing
investing
operating

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11
Q

financing

A

how a company pays for growth/expansion

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12
Q

what are the two ways to finance?

A 
borrowing (liabilities)
selling ownership (stock)
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13
Q

borrowing

A

temporary form of financing

you have to pay it back

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14
Q

selling ownership

A

permanent form of financing

you don’t have to pay it back

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15
Q

investing

A 
purchasing resources (assets) to be used in day-to-day operations 
LONG TERM ASSETS
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16
Q

operating

A

activities that earn revenue and generate expenses (day-to-day activities)

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17
Q

what is the purpose of accounting?

A

to identify, measure, and communicate information about a company that is useful in making economic decisions

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18
Q

information system of accounting

A

decision maker->(analyze)
transaction occurs->
accounting records->(recording or book keeping)
4 standardized financial statements->(summarize)
decision maker (again)

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19
Q

internal users

A

management of a company

ex: payroll is needed

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20
Q

management accounting

A

limited only by the extent of data available and the cost involved in generating the information

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21
Q

external users

A

those not directly involved in the operations of a business

ex: financial statements are needed

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22
Q

financial accounting

A

limited by the presentation of information by the company’s management

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23
Q

balance sheet

A

shows the financial position of the company AT A SINGLE POINT IN TIME
“snapshot”

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24
Q

accounting equation

A

assets=liabilities+stockholder’s equity

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25
Q

assets

A

resources that will produce a future economic benefit

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26
Q

liabilities

A

debts owed to creditors, suppliers, employees, customers

“payable”

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27
Q

equity

A

financing provided by owners and operations of the company

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28
Q

common stock

A

investments made by owners

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29
Q

retained earnings

A

cumulative earnings of the company that have been retained (reinvested in the company)

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30
Q

statement of retained earnings

A

shows how net income and dividends cause change in.a company’s financial position during a period of time

31
Q

retained earnings equation

A

beginning retained earnings
+net income
-dividends

32
Q

net income equation

A

revenues-expenses

33
Q

statement of cash flows

A

shows the actual change in cash of a company for a period of time

34
Q

equation for cash flows

A

cash flows from operating, investing, and financing activities+cash at the beginning of the period

35
Q

what is the order in which you prepare financial statements?

A

income statement
statement of retained earnings
balance sheet
statement of cash flows

36
Q

footnotes

A

give added details necessary to under financial conditions a company

37
Q

what is the basic objective of financial reporting?

A

to provide economic information about a company that is useful in making an “informed decision”

38
Q

“informed decision”

A

the investor/creditor/supplier wants to be able to analyze the financial statements to determine the amounts, timing and uncertainty of future cash flows

39
Q

what are the underlying assumptions of accounting help the decision maker to understand what accounting information reports as well as inherent limitations?

A 
economic entity
going concern
monetary unit
time period assumption
cost principle
40
Q

economic entity

A

business transactions are separate from the personal transactions of the owners

41
Q

going concern

A

company will continue to operate into the foreseeable future without forced liquidation

42
Q

monetary unit

A

all information will be measured in its national currency

done in monetary unit of the country it is traded in

43
Q

time period assumption

A

the long life of a company can be reported over a series of shorter time periods

44
Q

cost principle

A

assets are recorded at original cost (what we paid for them)

45
Q

do we record costs as historical or current?

A

we keep assets recorded at historical costs until we get rid of them (otherwise its subjective)

46
Q

what are the measurement rules?

A

general accepted accounting principles (GAAP)

47
Q

generally accepted accounting principles (GAAP)

A

a common set of “rules” used to report US financial statements

48
Q

financial accounting standards board (FASB)

A

private sector body given responsibility to develop GAAP

49
Q

securities and exchange commission (SEC)

A

a federal (government) agency that has broad powers to prescribe accounting practices and standards to public companies that trade securities on the major exchanges (NYSE and NASDAQ)

50
Q

what special privileges does the SEC have?

A

the SEC can influence or override any FASB ruling “checks and balances”

51
Q

american institute of certified public accountants (AICPA)

A

professional organization go certified public accounts

not considered “direct” influence

52
Q

international accounting standards board (IASB)

A

working towards a convergence of international reporting standards (IFRS) and GAAP

53
Q

global differences in accounting standards

A

some IFRS principles differ from GAAP
ex: accounting for inventories, accounting for losses on income statement, accounting for PPE (property, plant, and equipment), accounting for research and development

54
Q

public company accounting oversight board

A

five member body that sets auditing standards (set responsibility)

55
Q

what is management’s responsibility?

A

accuracy

56
Q

what are the auditor’s responsibility?

A

to attest to the fairness

57
Q

what makes information useful?

A

if it is relevant and reliable

58
Q

relevance

A

information makes a difference in decision making

59
Q

reliability/accurate

A

verifiable
representational faithfulness
neutral

60
Q

verifiable

A

free from error

have “backup”

61
Q

representational faithfulness

A

numbers represent what really happened in the business; factual

62
Q

neutral

A

free from bias

63
Q

decision makers should:

A
  1. be aware of ethical conflicts
  2. ask questions, do research
  3. be aware of pressures to make choices that are not in best interest
64
Q

decision making model:

A
  1. recognize an ethical dilemma
  2. analyze key elements in a situation
  3. list alternatives and evaluate impact of each
  4. select best alternative
65
Q

when was the sarbanes-oxley act passed?

A

2002

66
Q

why was the sarbanes-oxley act passed?

A

to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals

67
Q

what was the result of the sarbanes-oxley act?

A
  1. management must now certify the accuracy
  2. severe penalties for fraudulent activity
  3. auditors must be independent
  4. increased responsibility of board of directors
68
Q

what were some of the accounting scandals uncovered in the early 2000s?

A

Enron, Tyco, Worldcom, Athur Anderson

69
Q

who sponsored the sarbanes-oxley act?

A

senator Paul Sarbanes of Maryland and congressman Michael Oxley of Ohio

70
Q

what are the management provisions of the sarbanes-oxley act?

A
  1. report effectiveness of internal control
  2. code of ethics
  3. CEO and CFO must certify (penalties if inaccurate)
  4. whistle-blower protection
71
Q

whistle-blower protection

A

firms must provide a mechanism for anonymous reporting of fraudulent activities in the company

72
Q

what are the board of directors provisions of the sarbanes-oxley act?

A
  1. some directors are required to be independent of management
  2. audit committee must be independent of management
73
Q

what are the external auditors provisions of the sarbanes-oxley act?

A
  1. you cannot consult AND audit

2. report to audit committee not management

74
Q

what are the enforcement provisions of the sarbanes-oxley act?

A
  1. Public Company Accounting Oversight Board can regulate auditing firms
  2. all accounting firms must register with the PCAOB

ACCT 229 (11 decks)

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