Financial Management Chapter 1

Front 1

Accounting system is always a double entry system why?

Back 1

Because we must maintain the equality of the balance sheet equation.

Front 2

Describe Buying on an open account?

Back 2

When a company purchases an inventory on a credit basis, its called buying on an open account.
If this credit does not have an interest than its Accounts payables, if it has an interest than its a notespayable transactions.

Front 3

Why do we care about the types of ownership in accounting?

Back 3

Due to accounting of owner's equity varies with type of ownership.

Front 4

Describe sole proprietary?

Back 4

This is a business with a single owner.
Each sole proprietorship is an entity which is different from the proprietor.
Cash in a business account of a sole propritor is an asset as compare to personal account.

Front 5

Describe Partnership?

Back 5

A partnership is an organization which joins two or more individuals who act as co-owners.
Examples are auto dealerships, group of physicians.

Front 6

Describe Corporation?

Back 6

Corporations are the businesses or organizations created under state laws in the USA. The owners have a limited liability, which means banks and creditors have claims against the corporate assets only.

Front 7

What is the main difference between corporation, sole proprietorship and partnernship?

Back 7

Incase of Sole propritorship and partnership, the banks and creditors can claim against personal assets.
Incase of corporation the claims can file against corporation assets only.
The only exception is limited liability partnership in which limits the liability of partners.
The equity in case of partnership and sole proprietory is reported as owner's equity while incase of Corporation its called stock holder's equity.

Front 8

What abreviations are used for denoting the corporations?

Back 8

Co. Corp, Inc.

Front 9

What are the benefits of forming a corporation?

Back 9

1- Transfer of ownerhsip is easy (to sell and buy stocks in the form of stock certificate)
2- Global tranfer of ownershi is also possible, many japanes and asian companies are traded at NYSE at the same time many US companies are traded at london stock exchange.
3- The life of the corporation is indefinite even if the owners change the corporation still have other stock holders in contrast to Sole Proprietorship and Partnership.
Although their are only 20% of businesses are corporation but they generate 90% of business activities while 72% of the businesses are sole proprietorship but they generate only 5% of the business activities.

Front 10

What does Par Value means?

Back 10

Most states require stock certificate to have some dollar amount printed on them which is called Par Value or stated value.

Front 11

Define Paid in Capital?

Back 11

The difference between the total amount the company recieves for the stock and the par value.

Front 12

When does an organization records a transaction related to stocks?

Back 12

A corporation only records a transaction when it sells stocks to the stock holders, it does not record a private stock trade between share holders in this case it only updates the ownership of the stocks.

Front 13

What is the primary responsiblity of board of directors?

Back 13

They look for the share holders interests and appoints the right managers.

Front 14

Describe the role of auditors?

Back 14

A person who examines the information used by managers to prepare the financial statement and attests the credibility of these statements.

Front 15

Define GAAP?

Back 15

Generally accepted accounting principles applies to all broad concepts and detailed practices to be followed in preparing and distinguishing financial statements.
In USA a private sector body sets GAAP with government oversight, but, in France government sets the GAAP standards directly.

Front 16

Define FASB?

Back 16

Financial Accounting Standards Board is responsible for establishing GAAP in the USA. Its a private sector body consists of 7 individuals who work full time with a staff to support them. They have a mandatory charge to all public companies. FASB's annual budget is more than 23 million. It calls its ruling on GAAP to be FASB Statements.

Front 17

Define IASB?

Back 17

International Accounting Standards Board was established to develop in a public interest, a high quality , understandable and enforceable global accounting standards.

Front 18

Describe Sarbenes Oxley Act

Back 18

With SOX Government has a larger role in regulating the audit profession.
1- Established the public accounting oversight board with powers to regulate many aspects of the public accounting and to set standards for audit procedures.
2- Prohibits public accounting firms from providing to auditing clients with certain non audit services such as design and implementation and internal audit outsourcing.
3-Required rotation every 5 years of the lead audit or coordinating partner and the reviewing partner on the audit.

Front 19

Describe Financial Accounting?

Back 19

Financial Accounting serves external decision makers such as stock holders, suppliers, banks and governments.

Front 20

Describe Financial Management?

Back 20

Financial Management serves internal decision makers, like top executives, department heads, college deans, hospital administrators and people on other management levels.