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23 Cards in this Set

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What are the four basic financial statements?
1-balance sheet
2-income statement
3-stmnt of changes in shareholder equity
4-stmnt of cash flows
*"Notes to the Financial Stmnts" is also an important element*
What are the set of guidelines which the financial statements are based on?
The general accepted accounting principles (GAAP).
What is the accounting equation?
assets = liabilities + shareholders equity
*this is the basis of the balance sheet*
What does an income statement show?
All revenues and expenses for a period of time, resulting in net income.
What does the statement of changes in shareholders' (owners') equity show?
The changes in shareholders' equity - BOTH CONTRIBUTED CAPITAL & RETAINED EARNINGS - for a period of time.
What does the statement of cash flows show?
All of the cash inflows and outflows for a period of time; it accounts for the difference btwn the balances in cash on the balance sheets at the end of 2 consecutive accounting periods.
Main purpose of a business?
-to make a profit, increasing the value of the company for the owners.
4 general types of businesses?
-service co.
-merchandising co: buys goods, adds value, then sells them
-manufacturing
-financial services: e.g. insurance/banking, etc.
The 3 major forms of business ownership?
1 - sole proprietorship
2 - partnership
3 - corporation (potential for widespread ownership often w/ separation of ownership & management)
Sole proprietorships & partnerships --> advantages/disadvantages?
-advantages: owner control & taxes flow to proprietor's income
-disadvantages: owner is liable for all business decisions & it's often difficult to raise capital
Corporations --> plusses & minuses?
-plusses: limited liability for the owners; easier to raise capital; owners can diversify their investments across many different companies, often for a very small investment
-minuses: management & owners are separate (creating a conflict of interests); corporations pay taxes and then the owners pay taxes again on the dividends they receive
What are the two sources of financing for a business?
1 - contributed capital (investments by the owners)
2 - liabilities (loans from outsiders)
What do you call the cost of using someone else's money?
Interest.
What are revenues and expenses?
-revenues: the amount earned from providing goods or services to customers
-expenses: the costs to earn those revenues
What are the two parts of shareholders' equity?
1 - contributed capital
2 - retained earnings (earned capital)
What's in the income statement?....time period captured?
-revenues & expenses (the accounting period is captured, often a fiscal year)
-all the expenses incurred to generate the period's revenue are included on the period's income statement
What's in the balance sheet?....time period captured?
-assets, liabilities & shareholders' equity (describes the financial position of a company at a given point in time)
How is the income statement related to the balance sheet?
-the net income amount from the income statement is added to retained earnings; this income statement number become part of the retained earnings total on the year-end balance sheet
Why do you need both an income statement and a statement of cash flows?
-income statement shows ALL revenues and expenses for a period of time, while the statement of cash flows just lists the CASH inflows and outflows during the period
*any transactions w/ owners are not included on the income statement*
Name the 3 types of activities that make up most business transactions.
-operating
-investing
-financing
Operating activities definition and examples....
-transactions that relate to the everyday, routine transactions needed to run a business
-examples: a product is sold; interest or dividend income is earned from bank deposits; inventory is purchased; employees paid
Investing activities definition and examples....
-transactions involving the sale and purchase of long-term assets used in the business
-examples: property and/or equipment is purchases or sold; other firms are purchased/invested in
Financing activities definition and examples....
-transactions related to how a business is financed
-examples: contributions from owners; money borrowed using loans; issuing long-term debt; issuing stock; repaying long-term debt PRINCIPAL; paying dividends to owner