Test 1 Flashcards
What are the three primary forms of business organizations?
- Sole Proprietorship (owned by one person)
- Partnership (owned by two people)
- Corporations (a separate legal entity owned by stockholders)
What are the advantages of Sole Proprietorship?
a. simple to establish
b. owner-controlled
c. profits and losses are part of owners taxable income
What are the disadvantages of Sole Proprietorship?
a. proprietor is personally liable
b. transfer of ownership
What are the advantages of a Partnership?
a. simple to establish
b. shared control– no loss
c. more economic resources and a broader skill set
What are the disadvantages of a Partnership?
a. partners personally liable
b. transfer of ownership
What are the advantages of Corporations?
a. easy to transfer ownership
b. easy to raise money
c. lower legal liablility for “owners”
What is the disadvantage of Corporations?
a. Double taxation: taxed at corporate lvl and individual lvl
What are companies goals?
to earn profits for owners
What is the purpose of financial information?
to provide inputs for decision making
What is accounting?
an information system that identifies, records and communicates economic events of an organization to interested users
Who are considered internal users?
a. proprietors/Partners
b. management
c. board of directors
d. employees
Who are considered external users?
a. investors
b. creditors
c. regulatory and taxing agencies
d. unions
What was the purpose of the Sarbanes-Oxley Act?
to reduce unethical behavior and decrease likelihood of future corporate scandals
What happened after the Sarbanes-Oxley Act was enacted?
certify accuracy of financial information, penalties for fraud became more severe and an increased independence of auditing CPA’s to help avoid conflicts of interest
Define financing activities
getting funds to start of expand buisness
What is debt financing?
borrowing money
What is equity financing?
selling stock
Define investing activities
purchase resources needed to operate the business
Define operating activities
basic transaction for which organization is in business
Define revenues
generated from sales or performing service
Define exspenses
costs incurred in earning revenue
What are the three types of financial statements?
- Income Statement
- Statement of Return Earnings
- Balance Sheet
What is an income statement?
it summarizes all revenue and expenses for a period of time (month, quarter, or year)
If revenue is greater than expenses, then what is the result?
Net Income
If revenue is less than expenses, then what is the result?
Net loss
What is a statement of return earnings?
it shows the amount of past and current profits
What is a balance sheet?
shows the relationship between assets and liabilities plus stockholders equity
What is the accounting equation?
Assets= Liabilities + Stockholders Equity
Define assets
resources owned by the company
What are examples of assets
- cash
- receivables
- inventory
- supplies
- prepaid insurance
- prepaid rent
- land
- accumulated depreciation
- equipment
- buildings
- copyrights
- goodwill
- patents
Define liabilities
amounts owed by the company
What are examples of liabilities?
- payables
- unearned service revenue
Define stockholder’s equities?
ownership claim on the buisness value of firm after debts have been paid
What are examples of liabilities?
- common stock
- retained earnings
The accounting equation must…
always remain balanced
What do revenues represent?
the recepit of assets for goods solde or services rendered. The receipt of assets from owner is an investment
Revenues are?
recognized when earned, NOT when cash is received
Expenses are?
- recognized when costs are incurred, not when the cash is paid
- are costs incurred to generate revenues
Statement of cash flows
shows cash increases and decreases for the three types of primary business activities
What is an annual report?
publicly traded companies required to provide stockholders with an annual report
What happens during management and discussion analysis?
management explains how it will pay short-term liabilities, explains how it will pay for itself to operate/expand, explains how profitable it has been, discusses recent trends and future expectations
What is the purpose of a footnote?
to clarify information contained in the financial statement
What are do footnotes do?
- describe how some numbers are computed
- describe account policies used
Define an auditor report
an auditor is a professional accountant who conducts an
