Test 1 Flashcards

1
Q

What are the three primary forms of business organizations?

A
  1. Sole Proprietorship (owned by one person)
  2. Partnership (owned by two people)
  3. Corporations (a separate legal entity owned by stockholders)
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2
Q

What are the advantages of Sole Proprietorship?

A

a. simple to establish
b. owner-controlled
c. profits and losses are part of owners taxable income

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3
Q

What are the disadvantages of Sole Proprietorship?

A

a. proprietor is personally liable

b. transfer of ownership

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4
Q

What are the advantages of a Partnership?

A

a. simple to establish
b. shared control– no loss
c. more economic resources and a broader skill set

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5
Q

What are the disadvantages of a Partnership?

A

a. partners personally liable

b. transfer of ownership

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6
Q

What are the advantages of Corporations?

A

a. easy to transfer ownership
b. easy to raise money
c. lower legal liablility for “owners”

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7
Q

What is the disadvantage of Corporations?

A

a. Double taxation: taxed at corporate lvl and individual lvl

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8
Q

What are companies goals?

A

to earn profits for owners

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9
Q

What is the purpose of financial information?

A

to provide inputs for decision making

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10
Q

What is accounting?

A

an information system that identifies, records and communicates economic events of an organization to interested users

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11
Q

Who are considered internal users?

A

a. proprietors/Partners
b. management
c. board of directors
d. employees

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12
Q

Who are considered external users?

A

a. investors
b. creditors
c. regulatory and taxing agencies
d. unions

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13
Q

What was the purpose of the Sarbanes-Oxley Act?

A

to reduce unethical behavior and decrease likelihood of future corporate scandals

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14
Q

What happened after the Sarbanes-Oxley Act was enacted?

A

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

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15
Q

Define financing activities

A

getting funds to start of expand buisness

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16
Q

What is debt financing?

A

borrowing money

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17
Q

What is equity financing?

A

selling stock

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18
Q

Define investing activities

A

purchase resources needed to operate the business

19
Q

Define operating activities

A

basic transaction for which organization is in business

20
Q

Define revenues

A

generated from sales or performing service

21
Q

Define exspenses

A

costs incurred in earning revenue

22
Q

What are the three types of financial statements?

A
  1. Income Statement
  2. Statement of Return Earnings
  3. Balance Sheet
23
Q

What is an income statement?

A

it summarizes all revenue and expenses for a period of time (month, quarter, or year)

24
Q

If revenue is greater than expenses, then what is the result?

A

Net Income

25
Q

If revenue is less than expenses, then what is the result?

A

Net loss

26
Q

What is a statement of return earnings?

A

it shows the amount of past and current profits

27
Q

What is a balance sheet?

A

shows the relationship between assets and liabilities plus stockholders equity

28
Q

What is the accounting equation?

A

Assets= Liabilities + Stockholders Equity

29
Q

Define assets

A

resources owned by the company

30
Q

What are examples of assets

A
  • cash
  • receivables
  • inventory
  • supplies
  • prepaid insurance
  • prepaid rent
  • land
  • accumulated depreciation
  • equipment
  • buildings
  • copyrights
  • goodwill
  • patents
31
Q

Define liabilities

A

amounts owed by the company

32
Q

What are examples of liabilities?

A
  • payables

- unearned service revenue

33
Q

Define stockholder’s equities?

A

ownership claim on the buisness value of firm after debts have been paid

34
Q

What are examples of liabilities?

A
  • common stock

- retained earnings

35
Q

The accounting equation must…

A

always remain balanced

36
Q

What do revenues represent?

A

the recepit of assets for goods solde or services rendered. The receipt of assets from owner is an investment

37
Q

Revenues are?

A

recognized when earned, NOT when cash is received

38
Q

Expenses are?

A
  • recognized when costs are incurred, not when the cash is paid
  • are costs incurred to generate revenues
39
Q

Statement of cash flows

A

shows cash increases and decreases for the three types of primary business activities

40
Q

What is an annual report?

A

publicly traded companies required to provide stockholders with an annual report

41
Q

What happens during management and discussion analysis?

A

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

42
Q

What is the purpose of a footnote?

A

to clarify information contained in the financial statement

43
Q

What are do footnotes do?

A
  • describe how some numbers are computed

- describe account policies used

44
Q

Define an auditor report

A

an auditor is a professional accountant who conducts an