Accounting Review: Chapters 1 & 2

Front 1

forms of business organizations

Back 1

sole proprietorship: owned by one person
partnership: owned by more than one
corporation: seprate legal entity owned by stockholders

Front 2

advantages and disadvantages of partnership

Back 2

advantages: simple to establish, owner controlled, tax advantages

disadvantages: partners are personally liable, transfer of ownership difficult

Front 3

advantages and disadvantages of partnerships

Back 3

advantages: simple to establish, owner controlled, tax advantages

disadvantages: owner is liable, financing is difficult, transfer of ownership difficult

Front 4

advantages and disadvantages of a corporation

Back 4

advantages: easy to transfer ownership, greater capital raising potential, lower liability

disadvantages: unfavorable tax treatment

Front 5

internal users

Back 5

managers who plan, organize run a business

Front 6

external users

Back 6

investors, creditors, others (tax authorities, regulatory agencies, customers, labor unions, economic planners)

Front 7

financial statements should reflect the results of these three types of activity...

Back 7

financing
investing
operating

Front 8

ways of outside financing a corporation

Back 8

borrowing money

issuing stock

Front 9

liabilities

Back 9

debts and obligations of the business -- represent claims of creditors on the resources owned by the business

Front 10

common stock

Back 10

stock representing the primary ownership interest in a corporation

Front 11

investing activities

Back 11

obtaining resources needed to operate a business

Front 12

assets

Back 12

economic resources of a company that are expected to benefit the company's future operations

ex: cash, accounts, inventory, buildings, equipment, furniture

Front 13

investings activities:

Back 13

purchase or sale of computers, delivery trucks, furniture, buildings
purchase or sale of investments

Front 14

operating activities

Back 14

operating activities are the main activities for which the organization is in business

revetues and expenses

Front 15

revenues

Back 15

the assets that result from sale of a product or service

Front 16

expenses

Back 16

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

Front 17

net income

Back 17

the excess of revenues over expenses

rev. - expenses = net income

Front 18

income statement

Back 18

reports the results of operations for a specific period of time

Front 19

retained earnings statement

Back 19

reports the changes in retained earnings for a specific period of time

Front 20

balance sheet

Back 20

reports the assets, liabilities, and stockholders' equity at a specific date

Front 21

statement of cash flows

Back 21

reports the cash receipts and payments for a specific period of time

Front 22

ACCOUNTING EQUATION

Back 22

assets = liabilities + stockholder's equity

Front 23

ORDER OF FINANCIAL STATEMENTS PREPARED

Back 23

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

Front 24

annual report

Back 24

- letter to stockholders
- managements discussion and analysis
- financial statements
- notes to financial statements
- reports of managemet's responsibilities
- auditor's reports

Front 25

letter to the stockholders

Back 25

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

Front 26

management's discussion and analysis

Back 26

describes the company's financial condition and results of operations
explains the difference in results from one year to the next

Front 27

notes to financial statements

Back 27

provides additional info. not included in the body of statements
does not have to be numeric

Front 28

reports of management's repsonsibilities

Back 28

management acknowledges its responsibility for:
consistency, integrity, and presentation of the financial info.
the effectiveness of internal control systems

Front 29

auditor's report

Back 29

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

Front 30

classified balance sheet

Back 30

current assets
long-term investments
property, plant, and equipment
intangible assets
current liabilities
long-term liabilities
stockholder's equity

Front 31

current assets

Back 31

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.

Front 32

long term investments

Back 32

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

Front 33

property, plant, and equiptment

Back 33

assets with relatively long, useful lives
assets used in operating the business
ex: land, buildings, machinery, delivery and equipment, furniture and fixtures

Front 34

depreciation

Back 34

practice of allocating an asset's full purchase price to a number of years instead of expensing a full cost in year of purchase

Front 35

accumulated depreciation

Back 35

shows the total amount of depreciation taken over the whole life of the asset

Front 36

assets that a company depreciates...

Back 36

should be shown at cost less accumulated deprecation

Front 37

intangible assets

Back 37

non-current assets - more than 1 yrs. , have no physical substance,

ex: patents, copyrights, trademarks, trade names, franchise

Front 38

current liabilities

Back 38

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

Front 39

long-term liabilities

Back 39

debts expected to paid after one year;

ex: bonds payable, mortgages payable, long term notes, lease liabilities, obligations under employee pension plans

Front 40

stockholder's equity

Back 40

capital stock: investments of assets in the business by stockholders
retained earnings: earnings kept for use in the business

Front 41

statement of stockholder's equity

Back 41

two parts:
common stock and retained earnings

the statement of stockholder's equity reports all changes in the common stock and retained earninfs accounts

Front 42

statements of cash flows

Back 42

provides info. about sources and uses of cash, organized

Front 43

statements of cash flows

Back 43

provides info. about sources and uses of cash, organized as
operating activities
investing activities
financing activities

Front 44

ratio analysis

Back 44

expresses relationship among selected items of financial data

relationships:
percentage
rate
proportion

Front 45

profitibility ratio

Back 45

measures the income or operating success of a company for a given period of time

earnings per share

Front 46

liquidity ratio

Back 46

net income / average # shares

measures short-term ability of company to pay its maturing obligations and meet unexpected needs for cash

Front 47

solvency ratio

Back 47

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

Front 48

multiple measures for ratio analysis

Back 48

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

Front 49

earnings per share

Back 49

eps = net income - preferred stocks dividends / ave. common shares outstanding

higher value = improved performance

Front 50

working capital

Back 50

measure of short-term ability to pay for obligations
difference between current assets and current liabilities

working capital = current assets - current liabilities

Front 51

current ratio

Back 51

current ratio = current assets / current liabilities

more dependable indicator

does not consider current compposition

Front 52

remaining liquid and solvent is as important as making a profit because...

Back 52

a company can survive a long time without profits... but it cant survive very long without cash

Front 53

primary accounting setting body in the US

Back 53

financial accounting standards board

Front 54

US govt. agency that oversees financial markets

Back 54

securities exchange commission

Front 55

GAAP

Back 55

rules of accounting

Front 56

FASB

Back 56

makes the rules

Front 57

SEC

Back 57

enforces the rules

Front 58

relevance

Back 58

info. makes a difference in decisions, provides basis for forecasts, confirms corrects prior ideas, timely

Front 59

reliability

Back 59

information must be free of error and bias; verifiable, faithful representation; neutral

Front 60

compariblity

Back 60

ability to compare information of different companies b/c they use the same accounting principles; different companies use similar accounting principles

Front 61

consistancy

Back 61

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