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Accounting > Chapter 1 > Flashcards

Chapter 1 Flashcards

1
Q

Balance sheet definition

A

A financial statement that reports the assets

and claims to those assets at a specific point in time

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2
Q

Basic accounting equation

A

Assets = Liabilities + Stockholders’ Equity

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3
Q

Certified Public Accountant (CPA)

A

An individual who has met certain criteria and is thus allowed to perform audits of corporations

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4
Q

Common Stock definition

A

Term used to describe the total amount paid

in by stockholders for the shares they purchase

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5
Q

Corporation definition

A

A business organized as a separate legal

entity owned by stockholders. (

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6
Q

Dividends definition

A

Payments of cash from a corporation to its

stockholders.

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7
Q

Expenses definition

A

The cost of assets consumed or services used in

the process of generating revenues

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8
Q

Income statement definition

A

A financial statement that reports
a company’s revenues and expenses and resulting net
income or net loss for a specific period of time

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9
Q

Liabilities definition

A

Amounts owed to creditors in the form of debts

and other obligations.

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10
Q

Management discussion and analysis (MD&A) definition

A

A section of the annual report that presents management’s views
on the company’s ability to pay near-term obligations,
its ability to fund operations and expansion, and its
results of operations

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11
Q

Net Income definition

A

The amount by which revenues exceed expenses.

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12
Q

Net loss definition

A

The amount by which expenses exceed revenues.

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13
Q

Notes to the Financial Statement definition

A

Notes clarify information presented in the financial statements and provide
additional detail.

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14
Q

Partnership definition

A

A business owned by two or more persons associated as partners. (

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15
Q

Retained Earnings definition

A

The amount of net income retained in

the corporation.

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16
Q

Retained Earnings Statement definition

A

A financial statement that
summarizes the amounts and causes of changes
in retained earnings for a specific time period.

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17
Q

Revenue definition

A

The increase in assets or decrease in liabilities
resulting from the sale of goods or the performance of
services in the normal course of business

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18
Q

Sarbanes-Oxley Act (SOX) definition

A

Regulations passed by Congress

to reduce unethical corporate behavior.

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19
Q

Sole proprietorship definition

A

A business owned by one person

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20
Q

Statement of Cash Flows definition

A

A financial statement that provides
financial information about the cash receipts and cash
payments of a business for a specific period of time.

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21
Q

Stockholder’s Equity definition

A

The owners’ claim to assets

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22
Q

Auditor’s Report definition

A

A report prepared by an independent
outside auditor stating the auditor’s opinion as to the
fairness of the presentation of the financial position and
results of operations and their conformance with generally accepted accounting principles.

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23
Q

Assets definition

A

Resources owned by a business.

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24
Q

Annual Report definition

A

A report prepared by corporate management
that presents financial information including financial
statements, a management discussion and analysis section,
notes, and an independent auditor’s report.

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25
Q

Accounting definition

A

The information system that identifies, records,

and communicates the economic events of an organization to interested users.

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26
Q

Example of sole proprietorship types of businesses

A

barber shops, law offices, and auto repair shops are

often sole proprietorships, as are farms and small retail stores.

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27
Q

Example of partnership types of businesses

A

Retail and service-type businesses, including professional

practices (lawyers, doctors, architects, and certified public accountants)

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28
Q

All benefits of a Sole Proprietorship

A
  1. Simple to establish
  2. Owner-controlled
  3. Tax benefits
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29
Q

All benefits of a partnership

A
  1. Simple to establish
  2. Shared control
  3. Tax benefits
  4. Broader skills and resources
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30
Q

All benefits of a corporation

A
  1. No personal liability
  2. Easier to raise funds
  3. Easier to transfer ownership
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31
Q

Goal of hybrid business organization

A

combine the tax advantages of partnerships

with the limited liability of corporations

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32
Q

Examples of Hybrid Business Organizations

A

S corporations and Limited Liability Corporations (LLCs)

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33
Q

Corporations outnumber partnerships and sole proprietorships by what factor?

A

5x

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34
Q

Types of users of financial information

A
  1. Internal

2. External

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35
Q

Example of Internal users

A

finance directors, marketing managers, human

resource directors, and company officers

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36
Q

Internal users definition

A

managers who plan, organize, and

run a business

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37
Q

Example of external users

A
  1. Investors
  2. Creditors
  3. Labor Unions
  4. Customers
  5. Regulatory Agencies
  6. Taxing Authorities
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38
Q

Year SOX was passed

A

2002

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39
Q

What type of companies does SOX apply to?

A

Publicly traded companies

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40
Q

What does SOX do?

A
  1. Require a system of internal controls
  2. Corporate executives and boards of directors must certify and enforce the controls
  3. Independent outside auditors attest to the internal controls
  4. Created the Public Company Accounting Oversight Board (P C A O B)
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41
Q

What are the 3 steps in resolving an ethical dilemma?

A
  1. Recognize an ethical situation and the ethical issues involved.
  2. Identify and analyze the principal elements in the situation.
  3. Identify the alternatives, and weigh the impact of each alternative on various stakeholders.
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42
Q

Which business type(s) is easier to raise funds?

A

Corporation

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43
Q

Which business type(s) is easy to establish?

A

Sole proprietorship and partnership

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44
Q

Which business type(s) have no personal legal liability?

A

Corporations

45
Q

Which business type(s) provide tax advantages?

A

Sole proprietorship and partnership

46
Q

Which business type(s) are easier to transfer ownership?

A

Corporations

47
Q

Which business types(s) are owner-controlled?

A

Sole Proprietorship

48
Q

Which business type(s) allow for shared control?

A

Partnerships

49
Q

Which business type(s) harness broader skills and resources?

A

Partnerships

50
Q

Security and Exchange Act filing requirements

A
  1. Form 10-K
  2. Form 10-Q
  3. SEC form 10
51
Q

How often is a SEC form 10-k filed?

A

Annually

52
Q

How often is a SEC form 10-Q filed?

A

Quarterly

53
Q

When is a company required to file a SEC Form 10?

A

If they have over $10 million in total assets or over 750 shareholders

54
Q

Benefits of Disclosure

A
  1. Lower costs of funds and labor

2. Economic benefits from reliable disclosures

55
Q

Costs of disclosure

A
  1. Preparation and dissemination
  2. Competitive disadvantages
  3. Litigation potential
  4. Political costs
56
Q

Which of the following did not result from the Sarbanes-Oxley Act?

a. Top management must now certify the accuracy of financial information.
b. Penalties for fraudulent activity increased.
c. Independence of auditors increased.
d. Tax rates on corporations increased.

A

D. - Tax rates did NOT increase for corporations

57
Q

3 Principal Types of Business Activity

A
  1. Investing
  2. Financing
  3. Operating
58
Q

Accounting Information System definition

A

Keeps track of the various business activities- financing, investing, and operating

59
Q

2 Primary Source of Funds for Financing

A
  1. Borrowing money (debt financing)

2. Issuing/selling shares of stock in exchange for cash (equity financing)

60
Q

Creditors definition

A

Party to whom debt amounts are owed

61
Q

Examples of liabilities

A

Notes payable
Bonds payable
________ payable

62
Q

Treasury stock definition

A

Term used to describe the amount paid by the company to buy back shares from the stockholders.

63
Q

True of False: In the event of bankruptcy creditor claims must be paid BEFORE stockholder claims.

A

True

64
Q

What are the 3 types of business activity?

A
  1. Financing

2. Investing

65
Q

What is another name for Property, Plant and Equipment

A

Fixed assets

66
Q

Examples of assets

A
  1. Property, plants, and equipment (fixed assets)
  2. Cash
  3. Investments (securities)
67
Q

What is another name for investments?

A

Securities

68
Q

Define “Investing Activities”

A

Purchase (or sale) of long-lived resources a company needs to operate.

69
Q

Define “Operating Activities”

A

The use of company resources to produce, promote, and sell its products and services.

70
Q

“Operating” Assets

A
  1. Supplies
  2. Inventory
  3. Accounts receivable
71
Q

Supplies definition

A

Assets used in day-to-day operations (rather than sold to customers).

72
Q

Inventory definition

A

Goods available for sale to customers.

73
Q

Accounts receivable definition

A

Right to receive money from a customer as the result of a sale.

74
Q

What are the 3 most common types of revenue?

A
  1. Sales revenue
  2. Service revenue
  3. Interest revenue
75
Q

Name 6 of the most common expenses?

A
  1. Cost of goods sold
  2. Selling expenses
  3. Marketing expenses
  4. Administrative expenses
  5. Interest expense
  6. Income tax expense
76
Q

Accounts Payable definition

A

The obligation to pay for goods purchased on credit from suppliers

77
Q

What word indicates liabilities arising from expenses?

A

Payable

78
Q

Issuing debt comes from _____

A

Investors

79
Q

Issuing equity comes from ______

A

Owners

80
Q

What are the two types of capital stock?

A
  1. Common Stock

2. Preferred Stock

81
Q

Which type of capital stock has voting rights?

A

Common stock

82
Q

What is treasury stock?

A

Term used to describe the amount paid by the company to buy back shares from the stockholders

83
Q

What are the four financial statements?

A
  1. Income statement
  2. Retained earnings statement
  3. Statement of cash flows
  4. Balance sheet
84
Q

What is another name for the balance sheet

A

The fundamental equation

85
Q

What does GAAP stand for?

A

Generally Accepted Accounting Principles

86
Q

Which financial statement helps users determine if the company’s operations are profitable?

A

Income Statement

87
Q

Why are financial statement users interested in net income?

A
  1. Investors are interested in a company’s past net income because it provides useful information about predicting future net income
  2. Creditors also use the income statement to predict future earnings

— Reporting a strong profit will make it easier for the company to raise additional cash either by issuing shares of stock or borrowing.

88
Q

Which 3 reports are produced for the same time period?

Which 1 report differs? How?

A

Same:

  1. Income Statement
  2. Retained Earnings
  3. Statement of Cash Flows

Different:
1. Balance sheet, is as of one specific date

89
Q

What is the format of the Retained Earnings Statement?

A

Previous retained earnings
+ Net Income
- Dividends
= Current retained earnings

90
Q

What is the format of the Income Statement?

A

Revenues
- Expenses
= Net income/net loss

91
Q

On the balance sheet, in what order are the assets listed?

A

In order of liquidity

92
Q

What does liquidity mean?

A

How quickly an asset can be converted into cash

93
Q

What is another word for liabilities?

A

Debt

94
Q

What are the two types of claims to assets?

A
  1. Claims by creditors (liabilities)

2. Claims by owners (stockholder’s equity)

95
Q

What is the format of the Balance Sheet?

A

Total Assets = Liabilities
+Stocks
+Retained earnings

**The equation MUST balance. Meaning assets = the sum of liabilities and stockholder equity

96
Q

The balance sheet is used to

A
  1. determine the likelihood creditors will be repaid
  2. determine if cash on hand is sufficient for immediate needs
  3. evaluate the relationship between debt and SE
    - does the company have a good debt and common stock ratio
97
Q

What are the 4 components of the annual report

A
  1. Financial Statements
  2. Management Discussion and Analysis
  3. Notes to the financial statements
  4. An independent auditor’s report
98
Q

In which report must management highlight favorable or unfavorable trends and identify significant events and uncertainties that affect these factors?

A

Management Discussion and Analysis (MD&A)

99
Q

True/False: Information in the Notes to the Financial Statements must be quantifiable (numeric).

A

False

100
Q

What are 3 types of Notes to Financial Statements?

A
  1. Descriptions of accounting policies and methods used in preparing the statements
  2. Explanations of uncertainties and contingencies
  3. Various statistics and details too voluminous to be included in the statements
101
Q

Auditor definition

A

An accounting professional who conducts independent examinations of a company’s financial statements.

102
Q

Unqualified Opinion

A

When an auditor is satisfied that the financial statements provide a fair representation of the company’s financial position and the results of operations in accordance with GAAP

103
Q

True/False: With an qualified opinion, we have complete confidence that the financial statements give an accurate picture of the company’s financial results.

A

False

104
Q

Which report is most closely associated with

  • Descriptions of significant accounting policies?
A

Notes to the financial statement

105
Q

Which report is most closely associated with

*Unqualified opinion

A

Auditor’s report

106
Q

Which report is most closely associated with

*Explanations of uncertainties and contingencies

A

Notes to the financial statement

107
Q

Which report is most closely associated with

*Description of ability to fund operations and expansion

A

MD&A

108
Q

Which report is most closely associated with

*Description of results of operations

A

MD&A

109
Q

Which report is most closely associated with

  • CPA
A

Auditor’s Report

Accounting (8 decks)

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