Lecture 1 - Flashcards
Financial accounting
VS.
Management accounting
Describe what is used for who
FA: Decision makers outside the entity:
Eg. investors, creditors, the public, the government
MA: Decision makers inside the entity
Eg. Managers, employees
Name the 3 types of business entities and their characteristics, benefits and disadvantages
1) Proprietorship
-Single owner/proprietor - small
-Personally liable for all debts
-For accounting purposes: distinct entity from owner; differenciates between owner’s assets and the entity’s assets. = Legally the same but accounting wise different.
*Benefits: Personal income tax, own boss, keep profits
*Disadvantages: Unlimited liability, less capital
2) Partnership
-2 or more partners as co-owners
-Income and losses ‘flow through’ to partners
-In limited-liability partnerships (LLPs) partners are only liable up to the investment they put in - common for larger companies.
*Benefits: Personal income tax, more capital, more people, easy to start
*Disadvantages: Liability, share of profits, disagreements, life of business is limited
3) Corporation
-Owned by shareholders
-Can raise large sums at capital by issuing shares
-Legally distinct from it owners
-Shareholders have no personal obligation for the corporation’s debt, limited liability.
*Benefits: Limited liability, capital, unlimited life, ownership is easily transferable
*Disadvantages: Double taxation, starting a corporation is expensive, closely regulated by government agencies.
Define ‘assets’
= A present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits
Define ‘Liability’
= A present obligation of the entity to transfer an economic resource as a result of past events - unavoidable duty or responsibility to do something.
Define ‘Shareholders’ Equity’
= A claim to what is left of the assets after deduction liabilities
Define ‘Income’ and ‘expense’
= Increase in assets or decreases in liability that results in an increase in shareholders’ equity
=The opposite
Define the elements of shareholders’ equity
1) Share capital: the amount invested by shareholders into the entity by share ownership.
2) Retained earnings: The amount that the entity has earned through profitable operation which has also been retained in the entity.
Explain the formula for Retained Earnings
-Ending at closing balance
Opening balance of retained earnings
+/-
Net income/ loss (Income - expenses)
-
Dividends
= Closing balance of retained earnings
Explain an define the 2 income and 2 expense types
1) Revenue: from business activities
2) Gains: from outside of business activities
Eg. selling land at a profit
1) Expenses: from business activities
2) Losses: from outside of business activities
Eg. selling land at a loss
Mention the 4 types of financial statements
1) Income statement
2) Statement of changes in equity
3) The balance sheet
4) The statement of cash flows
What does the Income Statement show?
-Shows financial performance
-Reports revenues and expenses from the period
-Bottomline = total income - total expenses = net income / net loss
What does the Statement of Changes in Equity show?
-A company’s transactions with its owners. Here the income statement is needed.
What does the Balance Sheet show and which 3 items does it report?
-Also called ‘Statement of Financial Position’
-Reflects the company’s position at a specific moment in time
1) Assets: Current (converted within 1 year) + long-term
2) Liabilities: Current + long-term
3) Shareholders’ equity: Shareholders’ ownership of the business’s residual assets.
What does the Statement of Cash Flow measure and what are its 3 types of activities?
-Measures cash receipts and payments.
1) Operating activities: cash flows from selling goods and services to costumers
2) Investing activities: Cash flow from purchasing and selling long-term assets
3) Financing activities: cash flows from borrowing money or repaying funds or equity transactions
