Accounting Chapters 1-3

Front 1

Sole Proprietorship

Back 1

a. Owned by one person

b. Simple set-up

c. Owner maintains control

d. More favorable tax treatment than corporationsOwners are personally liable for business debts because not a separate legal entity

Front 2

Partnership

Back 2

a. Two +people in business together

b. Often formed when one person doesn’t have the economic resources to start the business alone and/or a person with unique skills or resources is needed

c. Partners should have a written partnership agreement that states duties and contributions.d. More favorable tax treatment than corporations

e. Owners are personally liable for business debtsbecause not a separate legal entity.

Front 3

Corporation

Back 3

a. Separate legal entity (separate from owners)b. Owned by “stockholders”

c. Investors give the business cash or other property in exchange for shares of stock.

d. Payments to stockholders are called dividends.

e. Easier for corporations to raise funds because: Shares are easier for investors to sell than ownership interests insole-proprietorships or partnerships. Investorscan invest in corporations with relatively small amounts of money (as opposedto sole-proprietorships and partnerships).f. Less favorable tax treatment (“double taxation”)

g. Owners are NOT personally liable for businessdebt because separate legal entity.

Front 4

What two types of users of financial information are there?

Back 4

Internal and External

Front 5

Define internal users of financial information

Back 5

Managers who plan, organize, and run the business

i. Must answer important questions re: the company

ii. Therefore,need TIMELY information

iii. Use both internal reports and FINANCIAL STATEMENTS

Front 6

Define external users of financial information

Back 6

a. Investors (owners) - Use financial information to decide whether to buy/hold/sell stock

b. Creditors (debtors such as banks and suppliers) Use financial information to evaluate the risk of selling on credit (suppliers) or lending money (banks)

c. Various others (such as taxing authorities,customers, labor unions, and regulatory agencies)

Front 7

What is the accounting equation?

Back 7

Assets = Liabilities + Shareholder Equity.

Front 8

What are current assets?

Back 8

those assets which are expected to be sold, consumed, or converted to cash within the longer of one year or one operating cycle -cash, accounts recievable, prepaid expenses, and inventory

Front 9

What are long term assets?

Back 9

equipment, furniture, buildings, land, long term notes recievable

Front 10

What are current liabilities?

Back 10

obligations that must be satisfied within one year or one operating cycle-accounts payable and other payables

Front 11

What are long term liabilities?

Back 11

long-term notes payable and other obligations which will occur farther in the future than one year or one operating cycle

Front 12

What are the three financial statements in the order they are prepared? (as required by the class omit statement of cash flows)

Back 12

1) The Income Statement

2) The Retained Earnings Statement

3) The Balance Sheet

Front 13

What is the income statement?

Back 13

a. Reports revenues and expenses for the period

b. Indicates how successfully the business performed during the period

c. Revenues are listed first followed by Expenses

Front 14

What is the retained earnings statement?

Back 14

Indicates how much of previous income was paidto owners as dividends and how much was retained in the company to allow forfuture growth

Beginning retained earnings + net income (from the income statement) –Dividends = Ending retained earningso If the company has a net loss, it would besubtracted rather than added.

Front 15

What is the balance sheet?

Back 15

Reports what a company owns (its assets) and what it owes (its liabilities) at a point in time

o Assets= liabilities + stockholders’ equity

Front 16

Net Income vs Net Loss

Back 16

Revenues – Expenses = Net Income (if Revenues > Expenses)

Revenues – Expenses = Net Loss (if Revenues < Expenses)

Front 17

What is stockholder's equity?

Back 17

Common Stock - results when a company sells new shares of stock to investors

Retained Earnings- ending retained earnings from the retained earnings statement

Front 18

What are the elements of an annual report?

Back 18

1) Financial Statements

2) Management Discussion and Analysis

3) Notes to the Financial Statements

4) Auditor’s Report

Front 19

What is included in the management discussion and analysis?

Back 19

a. Written by management and discusses their viewsre: ability to pay near-term debt, ability to fund operations and growth, and resultsof operations

b. Subjective in nature (because projecting futureevents)

Front 20

What are included in the notes of the financial statements?

Back 20

a. Every set of financial statements is accompanied by a set of notes.

b. They are an integral part of the financial statements.

c. They clarify the financial statements and provide additional detail.

d. Need not be quantifiable in nature

Front 21

What is the auditor's report?

Back 21

a. Prepared by an independent outside auditor

b. States the auditor’s opinion of the fairness of the presentation of the financial position and results of operations and their conformance with GAAP

c. Unqualified opinion = auditor believes the financial statements are presented fairly

d. Anything other than an unqualified opinion =users should be careful in using the financial statements to make decisions

Front 22

What is the classified balance sheet?

Back 22

We group similar assets together and similarliabilities together To improveunderstanding

Items within each group have similar economiccharacteristics

Front 23

What are the standard classifications included on the classified balance sheet?

Back 23

o Assets§

-Current Assets, Long-term investments, Property, plant, and equipment,Intangible assets

o Liabilities and stockholders’ equity

- Current liabilities,Long-term liabilities,Stockholders’ equity

Front 24

What is the earnings per share profitibility ratio?

Back 24

Measures the income earned on each share ofcommon stock

EPS = (Net income – Preferred stock dividends)

_____________________________________________

Average common sharesoutstanding

Front 25

What is the Working Capital ratio?

Back 25

Measures the liquidity of the company

Working Capital = Current assets – Current liabilities

Front 26

What is the Current Ratio?

Back 26

Indicates the number of dollars of currentassets a company has to pay each dollar of current liabilities and is a better measure of liquidity than the Working Capital Ratio

Current Ratio = Currentassets/Current liabilities

Front 27

What is the debt to asset ratio?

Back 27

Debt to assets ratio = Total liabilities/Totalassets

-Measures the percentage of total financingprovided by creditors rather than stockholders

-Indicates that every dollar of assets wasfinanced by [_] cents of debt

Front 28

What is the GAAP?

Back 28

A set of rules and practices, having substantial authoritative support, that the accounting profession recognizes as a general guide for financial reporting purposes

Generally Accepted Accounting Principals

Front 29

What is the SEC?

Back 29

The agency of the U.S. government that oversees U.S. financial markets and accounting standard-setting bodies

Securities and Exchange Commission

Front 30

What is the FASB?

Back 30

The primary accounting standard-setting body in the U.S.

Financial Accounting Standards Board

Front 31

What are the qualities of useful information?

Back 31

Relevance: information makes a difference in decision making

Reliability: information is verifiable, factual, and neutral

Comparability: information can be used to compare different entities

Consistency: information is consistently presented from year to year

Front 32

What is the monetary unity assumption?

Back 32

An assumption that requires that only those things that can be expressed in money are included in the accounting records.

Front 33

What is the economic entity assumption?

Back 33

an assumption that requires that the activities of an entity be kept separate and distinct from the activities of its owner and all other economic entities

Front 34

What is the periodicity assumption?

Back 34

a company can divide its economic activities into artificial time periods (monthly, quarterly, yearly)

Front 35

What is the Going-Concern Assumption?

Back 35

the assumption that the company will continue in operation for the foreseeable future

Front 36

What is the Cost Principle assumption?

Back 36

GAAP requirement that companies account for and report most assets & liabilities on the basis of acquisition price

Front 37

What is the Fair Value Principle?

Back 37

indicates that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability)

Front 38

What is the Full Disclosure Principle?

Back 38

Ensures that all relevant financial information is reported.

Front 39

What is Cost Constraint?

Back 39

weighs the cost that companies will incur to provide the information against the benefit that financial statement users will gain from having the information available.

Front 40

What is transaction analysis?

Back 40

The process of identifying the specificeffects of economic events on the accountingequation.

Front 41

There are 6 types of accounts (ALSRED) Name them.

How does a debit/creditaffect the balance in that account type (increase or decrease)? And what is the normal balance?

Back 41

TYPE | DEBIT | CREDIT | NORMAL BALANCE

Assets - Incr - Decr - Debit

Liabilities - Dec - Incr - Credit

SH’ Equity - Dec - Incr - Credit

Revenues - Decr - Incr - Credit

Expenses - Incr - Decr - Debit

Dividends - Incr - Decr - Debit

Front 42

General Journal Entries

Back 42

- are recorded in the general journal

- lists all debits followed by all credits

- account title on all credits are indented

Front 43

What does POSTING to the general ledger entail?

Back 43

is the process of transferring amounts from the journal to theledger accounts. Posting to the ledgeris the third step in the accountingcycle.

Front 44

What is the T-Account General Ledger?

Back 44

gets its name from the factthat it looks like a T, with the account listed at the top and debit entries tothat account on the left and creditentries on the right. If the debit entries are greater, then theaccount will have a debit balance. Ifthe credit entries are greater, then the account will have a creditbalance.

Front 45

What is the trial balance?

Back 45

- includes a list of allaccounts and their balances at a given point in time.

-List all accounts, starting with balance sheetaccounts (in the order they would be on the balance sheet), then dividends,then income statement accounts (in the order they would be on the incomestatement).

- Debit column and credit column with total at thebottom, which should BALANCE!