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61 Cards in this Set

  • Front
  • Back
forms of business organizations
sole proprietorship: owned by one person
partnership: owned by more than one
corporation: seprate legal entity owned by stockholders
advantages and disadvantages of partnership
advantages: simple to establish, owner controlled, tax advantages

disadvantages: partners are personally liable, transfer of ownership difficult
advantages and disadvantages of partnerships
advantages: simple to establish, owner controlled, tax advantages

disadvantages: owner is liable, financing is difficult, transfer of ownership difficult
advantages and disadvantages of a corporation
advantages: easy to transfer ownership, greater capital raising potential, lower liability

disadvantages: unfavorable tax treatment
internal users
managers who plan, organize run a business
external users
investors, creditors, others (tax authorities, regulatory agencies, customers, labor unions, economic planners)
financial statements should reflect the results of these three types of activity...
financing
investing
operating
ways of outside financing a corporation
borrowing money

issuing stock
liabilities
debts and obligations of the business -- represent claims of creditors on the resources owned by the business
common stock
stock representing the primary ownership interest in a corporation
investing activities
obtaining resources needed to operate a business
assets
economic resources of a company that are expected to benefit the company's future operations

ex: cash, accounts, inventory, buildings, equipment, furniture
investings activities:
purchase or sale of computers, delivery trucks, furniture, buildings
purchase or sale of investments
operating activities
operating activities are the main activities for which the organization is in business

revetues and expenses
revenues
the assets that result from sale of a product or service
expenses
the costs of assets consumed or services or services used to generate revenues

ex: cost of sales, store operating expenses, gen. and andmin. expenses, interest expenses
net income
the excess of revenues over expenses

rev. - expenses = net income
income statement
reports the results of operations for a specific period of time
retained earnings statement
reports the changes in retained earnings for a specific period of time
balance sheet
reports the assets, liabilities, and stockholders' equity at a specific date
statement of cash flows
reports the cash receipts and payments for a specific period of time
ACCOUNTING EQUATION
assets = liabilities + stockholder's equity
ORDER OF FINANCIAL STATEMENTS PREPARED
1. income statement
2. retained earnings statement
3. balance sheet
4. cash flow

why? income statement gives you the net income, and then net income is factored into retained earnings, and then with that you use that to find stockholder's equity
annual report
- letter to stockholders
- managements discussion and analysis
- financial statements
- notes to financial statements
- reports of managemet's responsibilities
- auditor's reports
letter to the stockholders
tells the stockholders about the company's performance and prospects, followed by a "financial highlights" section that presents key stats. for a five yr. period
management's discussion and analysis
describes the company's financial condition and results of operations
explains the difference in results from one year to the next
notes to financial statements
provides additional info. not included in the body of statements
does not have to be numeric
reports of management's repsonsibilities
management acknowledges its responsibility for:
consistency, integrity, and presentation of the financial info.
the effectiveness of internal control systems
auditor's report
auditor's report:
auditor - independent CPA who conducts an independent exam.;
auditor gives unqualified opinion on if the financial statements present the financial position, results of operations, and cash flows in accordance with GAAP
auditor evaluates the effectiveness of the company's internal control system
classified balance sheet
current assets
long-term investments
property, plant, and equipment
intangible assets
current liabilities
long-term liabilities
stockholder's equity
current assets
assets that are expected to be converted into cash within one year
current assets are listed in order of liquidity
ex: cash, short-term investments, supplies, prepaid expenses, etc.
long term investments
investments of stocks an bonds of other corporations which are normally held for many years
investments in long term assets such as land and buildings that are not currently being used in the company's operations
property, plant, and equiptment
assets with relatively long, useful lives
assets used in operating the business
ex: land, buildings, machinery, delivery and equipment, furniture and fixtures
depreciation
practice of allocating an asset's full purchase price to a number of years instead of expensing a full cost in year of purchase
accumulated depreciation
shows the total amount of depreciation taken over the whole life of the asset
assets that a company depreciates...
should be shown at cost less accumulated deprecation
intangible assets
non-current assets - more than 1 yrs. , have no physical substance,

ex: patents, copyrights, trademarks, trade names, franchise
current liabilities
obligations that are supposed to be paid within the coming year...
accounts payable, wages payable, bank loans available, interest payable, taxes payable, current maturities of long-term bank loans payable
long-term liabilities
debts expected to paid after one year;

ex: bonds payable, mortgages payable, long term notes, lease liabilities, obligations under employee pension plans
stockholder's equity
capital stock: investments of assets in the business by stockholders
retained earnings: earnings kept for use in the business
statement of stockholder's equity
two parts:
common stock and retained earnings

the statement of stockholder's equity reports all changes in the common stock and retained earninfs accounts
statements of cash flows
provides info. about sources and uses of cash, organized
statements of cash flows
provides info. about sources and uses of cash, organized as
operating activities
investing activities
financing activities
ratio analysis
expresses relationship among selected items of financial data

relationships:
percentage
rate
proportion
profitibility ratio
measures the income or operating success of a company for a given period of time

earnings per share
liquidity ratio
net income / average # shares

measures short-term ability of company to pay its maturing obligations and meet unexpected needs for cash
solvency ratio
measures the ability of the company to survive over a long period of time

total debt/ total assets

free cash flow = cash provided by operations - capital expenditures - cash dividends

measures percentage of assets financed by creditors rather than stockholders
multiple measures for ratio analysis
intracompany ratios: covering 2 yrs. of the same company
industry -ave. comparisons: based on the ave. ratio for a particular industry
intercompany comparisons: based on comparisons with a competitor in the same industry
earnings per share
eps = net income - preferred stocks dividends / ave. common shares outstanding

higher value = improved performance
working capital
measure of short-term ability to pay for obligations
difference between current assets and current liabilities

working capital = current assets - current liabilities
current ratio
current ratio = current assets / current liabilities

more dependable indicator

does not consider current compposition
remaining liquid and solvent is as important as making a profit because...
a company can survive a long time without profits... but it cant survive very long without cash
primary accounting setting body in the US
financial accounting standards board
US govt. agency that oversees financial markets
securities exchange commission
GAAP
rules of accounting
FASB
makes the rules
SEC
enforces the rules
relevance
info. makes a difference in decisions, provides basis for forecasts, confirms corrects prior ideas, timely
reliability
information must be free of error and bias; verifiable, faithful representation; neutral
compariblity
ability to compare information of different companies b/c they use the same accounting principles; different companies use similar accounting principles
consistancy
use of the same accounting principles and methods from year to year within the same company; company uses the same accounting methods from year to year