Acct Chapters 1-3

Front 1

Sole Proprietorship

Back 1

-business owned by one person
-simple to establish
-tax advantages
-owner controlled
-owner personally liable
-financing difficult

Front 2

Partnertship

Back 2

-two or more owners
-simple to establish
-shared control
-broader skills and resources
-tax advantages
-personal liability

Front 3

Corporation

Back 3

-separate legal entity owned by stockholders
-easy to transfer ownership
-greater capital raising potential
-lower legal liability
-unfavorable tax treatment

Front 4

Internal Users

Back 4

-managers who plan organize and run a business
--marketing managers, production supervisors, finance directors,company officers

Front 5

External Users

Back 5

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

Front 6

Sarbanes - Oxley Act (SOX)

Back 6

-congress passed in 2002 to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals

Front 7

Types of Business Activity

Back 7

Financing, Investing, Operating

Front 8

Financing Activities

Back 8

-Liabilities: Bank loans, debt securities, goods on credit or payables
-stockholders' equity (selling stock creates stockholders' equity)

Front 9

Investing Activities

Back 9

-Obtaining resoures or assets to operate the business
--land, buildings, vehicles, comps, furniture, equipments
-Investments

Front 10

Operating Activities

Back 10

-Primary activity of business: selling goods, providing services, manufacturing, cost of sales,advertising, paying employees, paying utilities.
-Revenues and expenses

Front 11

Financial Statements

Back 11

1. income statement
2. retained earnings statement
3. balance sheet
4. statements of cash flows

Front 12

Income Statement

Back 12

-reports operaitng success or failure for a period
-summarized revenues and expenses for period: month, quarter, year
-Do this statement first!

Front 13

Retained Earnings Statement

Back 13

-shows changes in retained earnings for period: month, quarter, year
-beginning balance + Net Income form income statement - dividents = ending balance
-do this statement second!

Front 14

Balance Sheet

Back 14

-reports assets and claims to assets
-liabilities (claims of creditors)
Stockholders equity (claims of owvers
- ASSETS = LIABILITIES + STOCKHOLDERS' EQUITY
- specific date--one point in time
-retained earnings from Retained Earnings Statement

Front 15

Statement of Cash Flows

Back 15

-info about cash receipts and cash payments
-summarized for period: month, quarter, year
-Where did the cahs come form?
- How was cash used during the period?
-What was the change in the cahs balance during the period?
-A COMPANY CANNOT SURVIVE WITHOUT CASH!
-Cash at end of period agrees with balance sheet
-cash effects of operating, investing and financing activities.
-cash flows from operating activities, investing activies, financing activities

Front 16

Assets

Back 16

-resources owned by the business
=cash
=accounts receivable
=inventories
=furniture and fixtures
=equipment
=supplies

Front 17

Liabilities

Back 17

-Obligations or debts of business
=notes payable
=accounts payable
=interest payable
=salaries payable
=unearned revenue

Front 18

Stockholders' Equity

Back 18

-Ownership claimes on assets
=paid-in cpital: common stock
=retained earnings
-COMMON STOCK + RETAINED EARNINGS

Front 19

Basic Accounting Equation

Back 19

ASSETS = LIABILITIES + STOCKHOLDERS' EQUITY

Front 20

Comparative Statements

Back 20

-financial statements that report info for more than one period
-allows useres to compare the financial position of the business at the end of an accounting period with that of previous periods

Front 21

Supplements to the Financial Statements in an Annual Report

Back 21

-Managment Discussion and Analysis
-Notes to Financial Statements
-Auditor's report

Front 22

Management's Discussion and Analysis

Back 22

-in supplements to financial statements in an anual report
Covers 3 items:
1) Liquidity
2) Capital resources
3) Results of operations

Front 23

Notes to financial statements

Back 23

-in supplements to the financial statements in an annual report
-explanatory notes and supplementary schedules
-clarifies info in financial statements
-expands with additional detail
-describes accounting policies
-explains uncertainties and contingencies

Front 24

Auditor's Report

Back 24

-In supplements to financial Statements in an Annual Report
-Certified Public Accountant (CPA): Auditor
-Aud. conducts independent examination of financial statements
-follows Generally accepted accounting principles (GAAP
-UNQUALIFIED OPINION

Front 25

GAAP

Back 25

Generally Accepted Accounting Principles

Front 26

Create the Heading

Back 26

Name of the company
Name of the Statement
Period of time (for the ___ ended [date]; can be just date like for balance sheet)

Front 27

Classified Balance Sheet

Back 27

Contains:
-Current Assets
-long-term investments
-property, plan, and equipment
-intangible Assets
-current liabilities
-long-term liabilities
-stockholders equity

Front 28

Curret Assets

Back 28

-On classified balance sheet
-assets that are expected be converted to cash or used up within one year
-current listed in order of liquidity
-ex): cash, short-term investments, receivables, inventories, supplies, prepaid expenses

Front 29

Current Liabilities

Back 29

-on classified balance sheet
-obligations that are supposed to be paid within the coming year
-notes payable, accounts payable IN ORDER OF MAGNITUDE
-ex): accounts payable, wages payable, bank loans payable, current maturities of long-term bank loans payable

Front 30

Long-Term Investments

Back 30

-on classified balance sheet
-stocks and bonds of other corporations which are held for many years
-investments in long-term assets such as land or buildings that are not currently being used in the company's operations

Front 31

Property, Plant and Equipment

Back 31

-on classified balance sheet
-assets with relatively long useful lives
-assets used in operating the business
-ex): land, buildings, machinerty, delivery equipment, furniture and fixtures

Front 32

Depreciation

Back 32

Practice of allocating an asset's full purchase price to a number of years instead of expensing full cost in year of purchase
-on balanace sheet under P,P, and E as 'Less: Accumulated depreciation
-assets that a company depreciates: land, buildings, machinery, equipment, construction in process

Front 33

Accumulated Depreciation

Back 33

-Shows the total amount of depreciation that the company has expensed thus far in the asset's life
-on balance sheet 'less: accumulated depreciation' under pp and e

Front 34

Intangible Assets

Back 34

-Non-current assets
-non physical substance
-ex): patents, copyrights, trademarks or trade names, franchise
-VALUE BECAUSE EXCLUSIVE RIGHTS OR PRIVILEGES THEY GIVE THE COMPANY

Front 35

Long Term Liabilities

Back 35

-debts expected to be paid after one year
-ex): bonds payable, mortgages payble, long-term notes payable, lease liabilities and obligations under employee pension plans

Front 36

Stockholder's Equity

Back 36

=common stock + retained earnings

Front 37

Common Stock

Back 37

investments of assets in the business by the stockholders

stockholders' equity = common stock + retained earnings

Front 38

Retained earnings

Back 38

earnings kept for use in the business
=net income(or loss) - dividends

Front 39

Statement of stockholders' equity

Back 39

-so can report all changes in stockholders' equity accounts : common stock and retained earnings

Front 40

Ratio Analysis

Back 40

-expresses relationship among selected items of financial statement data (%, Rate, Proportion)
-3 types
1. Profitability Ratios
2. Liquidity Ratios
3. Solvency Ratios

-Mulitple measures:
1. intracompany comparisons
2. Industry average comparisons
3.Intercompany comparisons

Front 41

Profitability Ratios

Back 41

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

Front 42

Liquidity Ratios

Back 42

-measures short-term ability of company to pay its maturing obligations and meet unexpected needs for cash
-working capital = current assets - current liabilities
-current ratio = current assets/current liabilities

Front 43

Solvency Ratios

Back 43

-measures the ability of the company to survive over a long period of time
-Debt to total Asset Ratio = total liabilities/total assets

Front 44

Earnings Per Share

Back 44

-profitability Ratio
-EPS = Net income - preferred stock dividends / avg common shares outstanding
(preferred stock dividends = 0)
-higher value = improved performance

Front 45

Working Capital

Back 45

Current Assets - Current Liabilities

liquidity ratio

Front 46

Current Ratio

Back 46

Current Assets/ Current Liabilities
-more dpendable indicator than working capital
-liquidity ratio
-does not consider composition of current assets

Front 47

Debt to Total Asset Ratio

Back 47

Total liabilities/total assets

-measures percnetage of assets financed by creditors rather than stockholders

-high is bad

Front 48

Statement of Cash Flows

Back 48

info about sources and uses of cash organized as:
-operating activities
-investing activities
-financing activities

Front 49

Free Cash Flow

Back 49

=cash provided by operations - captital expenditures - cash dividends
- op. cap. div. OCP

Front 50

Standard-Setting Environment

Back 50

-GAAP are the rules
-FASB makes the rules
SEC enforces the rules
-IASB: acct standard of many countries outside the US

Front 51

FASB

Back 51

Financial Accounting Standards Board

makes the rules

Front 52

GAAP

Back 52

Generally accepted accounting principles

are the rules

Front 53

SEC

Back 53

Securities and Exchange Commission

enfores the rules

Front 54

IASB

Back 54

International Accounting Standards Board

acct standards of many countries outside the US

Front 55

Characteristics of Useful Information

Back 55

-established by FASB
1. Relevance
2. Reliability
3. Comparability
4. Consistancy

Front 56

Relevance

Back 56

-characteristic of useful info
1. provides a basis for forecasts
2. confirms or corrects prio expectations
3. is timely

-IF IT WOULD MAKE A DIFFERENCE IN A BUSINESS DECISION

Front 57

Reliability

Back 57

Characteristic of Useful Info
1. is verifiable- info can be depended on and FREE OF ERROR
2. is a faithful representaion
3. is neutral

Front 58

Comparability

Back 58

Characteristic of useful info
-different companies use similar accounting principles
-compaaring apples to apples
-each company must disclose the accounting methods used

Front 59

Consistnecy

Back 59

Characteristic of Useful Info
-company uses same accounting methods from year to year
-can change to new method if management can justify that the new method produces more useful financial info

Front 60

Accounting Transactions

Back 60

-economic events that must be recorded in the financial statements
-occurs when assets, liabilities, or stockholders' equity items change as a result of an economic event

Front 61

Accounting Information System

Back 61

-collects and processes transactions
-communitcates financial information to decision makers

Front 62

Transaaction Analysis

Back 62

the process of identifying the specific effects oe economic evenets on the accounting equation --> accounting equations must ALWAYS BALANCE (Assets = liabilities + stockholders' equity

Front 63

Account

Back 63

-individual accounting record of increases and decreases in a specific Assets, Liability, or Stockholders' equity
- T-Account 3 parts:
--title
--debit side and credit side
--balance

Front 64

Basic Steps in the Recording Process

Back 64

1. Analyze - analyze each transaction and effect on accoutns
2. Journalize - enter transaction information in a journal, called journalizing
3. Post - transfer (post) the journal information to the approriate accounts in the ledger

Front 65

Double-entry System

Back 65

the two sided effect of each transaction is recorded in appropriate accounts
-sum of debits must equal sum of cretis
-each accounting transaciton

Front 66

Chart of Accounts

Back 66

Is a list of a company's accounts
-number and type of accounts used differ for each company

Front 67

General Journal

Back 67

-transactions recorded in chronological order
-each transaction shows the debit and credit effect on specific accounts
-composed of: Date, Account titles and explanation, debit, credit

Front 68

Ledger

Back 68

-entire group of accounts maintained by a company is referred to collectively as the ledger
-entries form the journal are posted to the ledger except for the general journal

Front 69

General Ledger

Back 69

-the entired group of accounts maintained by a company
-contains all the asset, liability, and stockholders' equity accounts

Front 70

Posting

Back 70

Transferring info from the journals to the general ledger accounts

Front 71

Trial Balance

Back 71

-A list of all the accounts and their balances at a given time
-to prove mathematcial equality of debit and credits after posting
-aids inthe preparation of financial statements
-RECORD:
company name
trail balance
date
name of account and debit or credit balance