Exam 1 - BYU Flashcards
What is accounting?
The means whereby a company’s financial transactions are identified, recorded, summarized and reported for the benefit of those who have an interest in the business
What is business? Kinds of businesses?
An organization created for the purpose of providing goods and services to customers
- Manufactions 2. Merchandising 3. Service
Keys to a successful business.
- Idea- A good idea for a product or service that can be sold at a profit.
- Capital- Money or resources to bring that product or service to life.
- Management Skill- The ability to effectively employ those resources and produce a profit.
Debt financing
- Borrowed resources/capital must be repaid at specified future dates, usually with interest. Debt is temporary financing.
- The consequences of a failure to repay debts and related interest on a timely basis can be harsh (i.e. bankruptcy or foreclosure)
- It can be difficult to qualify for.
The Key Advantage of Debt Financing:
- No sacrifice of ownership rights (voting, profit sharing)
Equity Financing
Investors contribute resources/capital in exchange for ownership interests in a business. In a corporation this ownership is evidenced by shares of stock. Ownership typically grants the following rights:
A. A right to vote or have a say in the affairs of the business.
B. A right to share in any profits of the business. This cost of capital could be very expensive.
C. A right to share in any remaining resources in the event of business termination.
Investor contributions of resources are not subject to repayment at a future date and there are no interest charges. Equity financing is permanent financing.
The Key Advantage of Equity Financing:
- No requirement to repay the capital contributed.
Financial Accounting
Financial Accounting seeks to provide information to current or future providers of capital (investors or creditors) and other interested parties outside of management (ie. government regulatory bodies). This is accomplished through periodic general purpose financial statements which provide summarized historical information on the company’s financial position and results of operations.
Managerial Accounting
Managerial Accounting seeks to provide information to assist managers in the effective operation of a business. This is accomplished through customized management reports that tend to be more detailed in nature and may include future budgets and forecasts as well as historical data. These reports are not generally available to the public and seek only to improve management’s future performance.
Characteristics of useful information
- Comparability 2. Credibility
What is GAAP? Explain its significance?
Generally accepted accounting principles (GAAP) are the rules and standards of accounting used to create comparable of information.
This need for GAAP became obvious with the stock market crash of 1929. There were no generally accepted accounting principles or standardized information requirements before the crash.
SEC
Congress created the Securities and Exchange Commission (SEC) to regulate the capital transactions of publicly-held companies.
-The SEC has the legal authority to determine GAAP for publicly-held companies, but originally delegated that responsibility to the American Institute of Certified Public Accountants (AICPA).
FASB
Financial Accounting Standards Board was formed to assume the responsibility for establishing GAAP.
GAAP and international business
However, today over 100 countries accept and use standards established by the International Accounting Standards Board (“IASB”) operating out of London, England. These standards are referred to as International Financial Reporting Standards or “IFRS” and in some cases they are very different from US GAAP.
Recently, the FASB and IASB joined together recognizing the growing need for common world-wide standards and agreed to participate in a joint effort to reconcile the differences between US GAAP and IFRS. This process, known as convergence, is progressing today on an active basis.
What do CPA’s do? Role of AICPA.
As a result, the SEC requires that all financial statements of publicly-held companies be subject to outside independant audit for accuracy by an independent certified public accounting firm (CPA).
The CPA must issue an auditor’s report which must accompany a company’s financial statements and clearly state the material reliability of the information and its compliance with GAAP.
- Exclusive right to perform audits of financial statements.
- Tax advice and preparation of various kinds of tax returns.
- Business consulting and advice:
- Information systems design and implementation. 2. Performance or operational audit.
- Business valuations.
- Mergers and business acquisitions.
- Fraud auditing and internal control reviews.
- Personal financial planning and investment advice.
External audits: who, what and why
Businesses which seek to acquire capital from the public must provide audited financial statements. The SEC requires such companies to provide financial statements prepared in accordance with GAAP and subjected to independent audit by a Certified Public Accountant.
C. Who has exclusive authority to perform external audits? Certified Public Accounting firms
Basic characteristics of proprietorship,
partnership and corporation.
- Proprietorship: - One owner.
Business Ownership: Three Basic Legal Forms
- No legal red tape except if employees hired.
- No seperation of business and personal legal liability. (This
can be addressed through insurance.) - No separate income taxation.
- Partnership: Same as proprietorship except there is more than one owner.
- No legal red tape except if employees hired.
- A formal partnership agreement is recommended but not
required.
- No separation of business and personal liability. - No separate income taxation. - Corporation: A separate legal entity apart from its owners
- Legal red tape in formation and operation imposed by the state. - One or more owners. A corporate form of business greatly
facilitates many owners and the transfer of ownership interests. - Separation of business and personal liability of owners.
- Seperation of business and personal taxation (double taxation)
