Section 1 Flashcards
3 kinds of business
manufacturing
merchandising
service
2 kinds of merchandising
retail
wholesale
3 elements to start a successful business
management skill
idea
capital
management skill
the ability to effectively employ resources and produce a profit
capital
money or resources to bring a product or service to life
a good idea
a product or service that can be sold at a profit
2 ways to access capital
debt or equity financing
debt financing
borrowing from lenders or creditors
equity financing
contributions from investors or owners
financing has to do with how
capital is obtained for a business
accounting
the language of business
3 characteristics of debt financing
- borrowed resources must be repaid
- consequences of failure to repay can be harsh
- can be difficult to qualify for
2 characteristics of equity financing
- investors contribute resources/captial in exchange for ownership interests
- investor contributions of resources are not subject to repayment
ownership grants what 3 rights?
- right to vote or have a say
- right to share in profits
- right to share in remaining resources if business terminates
key advantage of debt financing
no sacrifice of ownership rights
key advantage of equity financing
no requirement to repay capital contributions
2 ways an owner gets their investment back
- distribution upon discontinuance
2. subsequent sale of ownership interests to other investors
3 ways investors make a profit/loss on investment
- sharing in the business operating profits through dividends
- capital gains or losses on the sale of stock
- distributions if the business is terminated
the primary purpose of financial accounting
provide info that assists investors and creditors in evaluating a company’s
- credit worthiness
- profit potential
financial accounting provides (4)
- HISTORICAL info
- to CREDITORS and POTENTIAL INVESTORS
- outside of management
- about the company’s FINANCIAL POSITION and RESULTS OF OPERATIONS
managerial accounting provides
- info that assists managers in the effective operation of a business
- more detailed reports
- not publicly available
- used to improve FUTURE performance
3 general purpose financial statements
- Balance Sheet
- Income Statement
- Cash flow Statement
financial statements are found
in a company’s annual report
2 critical conditions that must exist for financial statements to be truly useful
- comparability
2. credibility
GAAP
generally accepted accounting principles
FASB
financial accounting standards board
what is credibility?
providing financial info that is materially accurate and reliable
the company’s management is responsible for
- a company’s accounting system
- the prep of its financial statements
what does the SEC do?
regulates stock and bond transactions
AICPA
american institute of cpa’s
name 2 functions of the AICPA
- license and certify CPA’s
2. establish rules of how to conduct an audit
GAAP was established by
the FASB
EPS
earnings per share
How do we know what the profit is?
earnings per share
GAAP establishes
rules of accounting and disclosure
T/F IASB has no regulatory authority
true
IFRS
international financial reporting standards
An external auditor’s report on financial statements expresses an opinion
- as to the fairness of the financial statements
2. as to compliance with GAAP
A company’s annual report provided to the public will typically include
- an explanation fr management summarizing the company’s operating results
- an external auditor’s report on the financial statements
- notes to the finanacial statements providing supplemental info
The professional organization for certified public accountants in the US is
the American Institute of Certified Public Accountants AICPA
T/F Company stock values are influenced most significantly by investors’ changing expectations of a company’s future earnings
true
T/F the primary purpose of financial accounting is to communicate info to the managers of a business
false
a disadvantage of the corporate form of business ownership is
possible double income taxation on profits distributed to the company owners
T/F the Novo Mercado is a Brazilian stock market that has been proposed primarily for the listing of foreign stocks (non-Brazilian in order to make investment in such companies more accessible to Brazilian investors
False, it is for the listing of Brazilian companies to attract foreign investors and capital to Brazil
T/F the SEC is considering the allowance of international accounting standards for companies wishing to access US capital markets, but such a policy is opposed by the the FASB and many US corporations
true
T/F the IASB is a London based organization that has been established to require and enforce the use of international accounting standards in countries receiving funds through the IMF
False
the prep and accuracy of a company’s financial statements and compliance with GAAP is primarily the responsibility of the company’s
management
T/F stock selling at a low P/E ratio is more characteristic of a growing company than one that has stabilized earnings
false
What is P/E ratio?
it shows the relationship of a company’s stock price relative to its earnings
t/f a sporting goods store in the local mall is an example of a merchandising business
true
when P/E ratio of a company is low relative to its earning
there is not a significant expectaton of future earnings growth
Why does high growth company stock sell at a higher PE ratio
because people are willing to pay higher prices to own the stock of companies for which higher eanings are anticipated or hoped for
financial accounting provides
information to investors and creditors
GAAP applies to what type of accounting
financial accounting
