Exam 1 Flashcards
What are the 3 forms of business organization?
- Sole proprietorship
- Partnership
- Corporation
A sole proprietorship has __ owner
1
A partnership has __________ owners
2 or more
A corporation has _____ owners due to the issuance of stock
Many
What are the three advantages of a sole proprietorship?
- Simple to establish
- Control
- Tax advantages (only have to pay taxes once)
What is a disadvantage of a sole proprietorship?
Personal liability (opens self up to being sued)
What are the three advantages of a partnership?
- Simple to establish
- Broader skills and resources
- Tax advantages
What is a disadvantage of a partnership?
Personal liability
What are three advantages of a corporation?
- Easy to transfer ownership
- Easy to raise capital (sell stock)
- No personal liability (most you can lose is stock investment)
What is a disadvantage of a corporation?
Taxes (paid twice; once by the company and once when dividends are paid)
Accounting is the information system that _________, __________, and ____________ the economic events of an organization to interested users.
Identifies, records, and communicates
A type of user that uses accounting to plan, organize, or run a business
examples: managers, supervisors, company officials
Internal user
A type of user that uses accounting to make decisions on whether to buy or sell stock or loan a company money
examples: investors, creditors, regulators
External user
An act passed by Congress that deals with ethical behavior of accounting
Sarbanes-Oxley Act (Sox Act)
What are the three types of business activities?
- Financing
- Investing
- Operating
Raising money is a type of __________ activity
Financing
Purchasing resources needed to operate a business is a type of _____________ activity
Investing
Day to day operations of a company is a type of _________ activity
Operating
Borrowing money from creditors and issuing shares of stock are examples of _____________ activities
Financing
Purchasing resources to be used in the business such as computers, equipment, delivery trucks, are examples of _______________ activities
Investing
A shoe store selling shoes, a dentist cleaning teeth, and a lawn care company mowing lawns are all examples of _________ activities
Operating
What type of statement reports revenue an expenses for a period of time?
Income statement
Net income = ___________ - ___________
Revenue - Expenses
What type of statement that reports changes in the net income retained in the business?
Retained earnings statement
Retained Earnings = ___________ - _________- ___________
Revenues - Expenses - Dividends (Net income - Dividends)
Ending Retained Earnings = ________ + ___________ - ___________
Beginning retained earnings + net income - dividends
What type of statement reports assets, liabilities, equity, and claims to assets at a specific point in time?
Balance sheet
Assets = _______ + ___________
Liabilities + stockholders equity
What type of statement shows sources and uses of cash flows?
Statement of cash flows
What are the three sections of a statement of cash flows?
- Financing
- Investing
- Operating
What is the only type of statement that DOES NOT cover a period of time, but rather, a day?
Balance sheet
If it is the start of a business, the beginning retained earnings is ________
Zero
Liabilities are also known as the ________ __ __________
Claims of creditors
Resources owned by a business are known as _______
examples: cash, accounts receivable, inventory, supplies, property, plant, and equipment
Assets
Amounts owed to creditors/suppliers are known as _________
examples: accounts payable, notes payable, bonds payable
Liabilities
Owner’s claims to assets are known as _____________
examples: common stock, retained earnings
Stockholder’s equity
Net income retained in the business is known as ___________
Retained earnings
Cash payments to stockholders are known as ___________
Dividends
Amounts earned from the sale of products or services performed are known as _______________
examples: service revenue
Revenues
Cost of assets consumed or services used is __________
examples: rent expense, utilities expense, interest expense, cost of goods sold
Expenses
When Revenues >(bigger than) Expenses, this results in a __________
Net income
When Expenses >(greater than) Revenues, this results in a ______
Net loss
How many parts does the annual report have?
4
What are the 4 parts of the annual report?
- Auditor’s report
- Management, Discussion, and Analysis
- Financial Statements
- Notes to Financial Statements
Revenues and Expenses always go on the __________ ___________
Income statement
Assets and Liabilities go on the ________ _________
Balance Sheet
Cost of goods sold is an __________
Expense
Any thing “payable” is a ______
Liability
Unearned service revenue is a ______
Liability
In a balance sheet, assets must _______ liabilities
Equal
What is the term for the time it takes a company to go from cash and then back to cash through the processes of financing, investing, and operating?
Operating Cycle
How are current assets listed in a balance sheet?
In the order of liquidity
____________ is how easy it is to convert something in to cash
Liquidity
What is the term for things that have value to the owner, but are untouchable, and are listed on the balance sheet under assets?
Intangible assets
Stocks and bonds are examples of ____________________
Long-term investments
Another term for accumulated depreciation is _____ _________
Contra Asset
What is another term for liabilities?
Claims of creditors
What is another term for stockholder’s equity?
Claims of owners
Assets that a company expects to convert to cash / use up in a year or less are _____________
Current assets
Investments that are held for more than a year are considered _____________________
Long term investments
Liabilities that are expected to be paid in a year or less are _________________
Current liabilities
Amounts received from issuing or selling stock is known as ________________
Common Stock
What are the three types of ratios used in accounting? very important to know
- Profitability
- Liquidity
- Solvency
What type of ration measures the INCOME or operating success of a company for a given time?
Profitability
What type of ration measures the SHORT-TERM ability of a company to pay its obligations?
Liquidity
What type of ratio measures the ability of the company to survive over a LONG PERIOD OF TIME?
Solvency
EPS (Earnings per share) is an example of what type of ratio?
Profitability
Working capital and current ratio are examples are what type of ratio?
Liquidity
Debt to total assets is what type of ratio?
Solvency
For the profitability and liquidity ratios, _____________ (higher or lower) is better
Higher
For the solvency ratio, _____________ (higher or lower) is better
Lower
Working capital = _________ - __________
Current assets - current liabilities
Current ratio = __________ / _________
Current assets / liabilities
Debt to total assets = _______ / ________
Total liabilities / total assets
What is the primary accounting standard setting body in the US? (makes the rules)
Financial Accounting Standards Board (FASB)
What issues standard (rules) called IFRS for countries overseas? (world-wide accounting, not just in US)
International Accounting Standards Board (IASB)
__________ is the set of rules used for accounting
Generally Accepted Accounting Principles (GAAP)
The 2 fundamental qualities for useful accounting information is …
- Relevant
- Faithful representation
Relevant information must have what 2 values?
- Predictive value
- Confirming value
Faithful representation must have be _________ , __________ , and _________
- Complete
- Neutral
- Free from error
If one company uses the same accounting principles from year to year, then this is an example of ___________
Consistency
If the information that is obtained through accounting can be proved and is free from error then it is _________
Verifiable
If different companies use the same accounting principles then this is an example of _________
Comparability
If the information obtained through accounting is available to decision makers before it loses the capacity to influence them, it is considered to have ___________
Timeliness
If the information obtained through accounting is clear and concise, it has _____________
Understandability
The _______ ________ principle states that assets / liabilities that are actively traded (e.g. investments) have to be recorded at their fair value
Fair Value
The ________ ________ principles records assets at what it costs to acquire, not the current value of it
Historical Cost
The ________ _________ principle states that companies must disclose all events that would make a difference in a decision
Full Disclosure
Transactions are financial events that require recording in the _________ _________
Financial statements
Cash “in advance” refers to ______________ which is a _________ (think LSU getting ticket money before playing games)
Unearned service revenue; liability
“Services performed” refers to _________ which is part of ___________
Revenue; stockholders equity
“On Account” refers to either ___________ or __________
Accounts payable; accounts receivable
_______ means left
Debit
_______ means right
Credit
The idea that each transaction must affect 2 separate accounts in order to keep everything in balance is called what?
Double-entry system
________ must equal _______
Debits; credits
Debits > Credits results in a _______ balance
Debit
Credits > Debits results in a _______ balance
Credit
What records the increase or decrease in a specific asset, liability, equity, revenue, or expense item?
T-Accounts
________ , ________ , and __________ are normally debited and on the left side of the accounting equation
Assets, Expenses, Dividends
_________ , __________ , __________ , and _________ are normally credited and on the right side of the accounting equation
Liabilities, Revenues, Common Stock, and Retained Earnings
What provides evidence of a transaction and is analyzed before starting the recording process?
Source documents
In the recording process, you record transactions in the _______ (journal or ledger) first and then in the ________ (journal or ledger)
Journal; ledger
Entering transactions in to a journal is referred to as ________
Journalizing
Transferring the journal entries in to the ledger is referred to as __________
Posting
In the journal, transactions are listed in ____________ order
Chronological
In the journal, ________ are first and ________ are indented on a separate line
Debits; credits
The ________ contains the entire group of accounts maintained by a company
Ledger
The listing of accounts used by a company to record transactions is called the _________ ___ __________
Chart of accounts
A list of accounts and their balances at a given time is known as the _________
Trial balance
The order of accounts in the trial balance is:
- Assets
- Liabilities
- Stockholders Equity
- Revenues
- Expenses
True or False: A trial balance is always free from error
False; trial balances may still balance even if a transaction was not journalized, not posted or posted twice, the incorrect accounts were used, or offsetting errors were made
