Powerpoint 1 Flashcards
Accounting definition
Self proprietorship
A business owned by one person
ex. A small owner-operated barber shop
Partnership
A business owned by two or more persons associated as partners
often because indivdual lacks sufficient economic resources
ex. lawyers, artchitects, CPAs
Corporation
A business organized as a seperate legal entity owned by stockholders
Investors receive shares of stock to indicate their ownership claim
Ex. NYSE members
Most of business is done by what?
Most common business is what?
Most of business- corporation
Most common - sel proprietorshipp and partnership
External users
Creditors/lendors
Private investors
Vendors
Customers
Taxing authorities
Regulators
Internal users
Managers who plan, organize, and run a business
ex. marketing manager, production supervisor, finance director, company officer
Investors
Use accounting information to make decisions to buy, hold, or sell stock
Creditors
Use accounting information to evaluate the risks of selling on credit or lending money
external user
Specific examples of external users
Taxing authorities
Customers
Labor unions
Regulatory Agencies
Ethics in financial reporting
Regulators and lawmakers concerned that the conomy would suffer if investors lost confidence in corporate accounting due to unethical financial reporting
3 business activities
Financing
Investing
Operating
Creditors
Persons or entities to whom a company owes money
Liabilities
Amonts owed to creditors
Have the legal right to be paid according to pre-determined schedule
Common stock
Total amount paid in by stockholders for the shares they purchase
Investors have no legal right to corporate cash until claims of creditors are satisfied
Dividends
Payments to stockholders
Two financing activities
- Borrow money
- Issue (sell) shares of stock
Investing activities
Involves the purchase of resources a company needs in order to operate
buying of LONG TERM assets
Assets
Resources owned by a business
Eg. property, plant, and equipment, investments, cash
Revenue
The increase in assets resulting from the sale of a product or service in the normal course of business
Inventory
Goods (assets) available for future sales to customers
Account receivable
right to receive money in the future
Expenses
The costs of assets consumed or services used in the process of generating revenues
es. cost of goods sold, selling expenses, marketing expenses, administrative expenses
Accounts payable
Operating activities
Revenue
Inventory
Account receivable
Expenses
Accounts payable
Net income =
Revenues > expenses
Net loss =
4 financial statements (in order)
IRBS
- Income statement
- Retained Earnings statement
- Balance Sheet
- Statement of Cash Flows
Income statement
Reports the successes or failures of the company’s operations for a period of time
Investors and creditors are interested in past income to predict future income
- relates to a company’s stock price
- helps creditors determine if company has ability to repay in the future
Retained Earnings Statement
Shows the amounts and causes of changes in retained earnings during the period
Allows users to evaluate the dividend payment practices
- investors may prefer high or low dividend payouts
- creditors take notice because dividends reduce ability to repay debts
Retained earnings
The net income retained in the corporation
Balance Sheet
Reports assets and claims to assets at a specific point in time
2 types of claims
- liabilties (claims of creditors)
- Claims of owners ( stockholder’s equity)
Assets = liabilities + stockholders’ equity
Basic Accounting Equation
Assets = liabilities + stockholders’ equity
Statement of Cash Flows
Provide financial information about the cash receipts and cash payments of a business for a specific period of time
Reports cash effects of a company’s operating, investing, and financing activities as well as net increase or decrease in cash
Questions statement of Cash Flows answers
Where did the cash come from?
How was the cash used during the period?
What was the change in the cash blance during the period?
Annual Report
Publicly traded companies MUST provide an annual report
Include:
Financial statements
MD&A
Notes to financial statements
Independent Auditor’s Report
Management Discussion & Analysis
Includes:
Ability to pay near-term obligations
Ability to fund operations and expansion
Its results of operations
*SEVERAL SUBJECTIVE STATEMENTS AND OPINIONS
Notes to the Financial Statements
Clarify the financial statements and provide additional detail
Info not all quantifiable
-descriptions of policies and methods
INTEGRAL
Auditor’s Report
Independent outside auditor peforms it
States auditor’s opinion as to the fairness of the statements
auditor’s must have CPA
Unqualified opinion- financial statements are fair
Unqualified opinion
Issued when the auditor is satisfied that the financial statements provide a fair representation of the company’s financial position and results of operations are in accordance with GAAP
Why so much in annual report?
Not all relevant info in financial statements
Users are interested in non-financial info
IFRS properties
Principles based
Developed by the International accounting Standards Board (IASB)
Non-US companies to not have to comply with SOX
U.S. GAAP properties
Rules based
Developed by the Financial accounting standards board (FASB)
SOX applies to large public companies on U.S. exchanges
