Chapter 1 Flashcards

(72 cards)

1
Q

external users

A

investors

creditors: e.g. bankers and suppliers. loans and on credit sells.

tax authorities

customers : for product waranty and production line support

labour unions: for wages

Regulatory agencies: is operating according to rules?

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2
Q

cogress law for ethic accounting

A

Sarbanes-Oxley Act (SOX).

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3
Q

Effective financial reporting depends on

A

sound ethical behavior

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4
Q

Sarbanes-Oxley Act (SOX) entails

A

Top management must now certify the accuracy of financial information.

Penalties for fraudulent activity increased.

Independence of auditors who review the accuracy of corporate financial statements increased.

oversight role of boards of directors increased.

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5
Q

three type of business activities

A

financing,

investing,

operating.

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6
Q

what activities does the accounting information system track?

A

financing, collecting the necessary funds

to support the business

investing, acquiring the resources necessary to run the business

operating. putting the resources of the business into

action to generate a profit.

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7
Q

primary sources of outside funds

A

Borrowing money (debt)

Issuing shares of stock for cash (equity).

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8
Q

liabilities

A

Amounts owed to creditors such as debt and other obligations.

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9
Q

creditors

A

Party to whom amounts are owed

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10
Q

types of liabilities

A

Notes payable

bonds payable

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11
Q

Common stock

A

term used to describe the amount paid by stockholders for shares they purchase.

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12
Q

dividends

A

Payments to stockholders

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13
Q

assets

A

Resources owned by a business

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14
Q

Revenues

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.

Amounts earned from the sale of products and other sources (sales revenue, service revenue, and interest revenue).

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15
Q

types of revenue

A

sales revenue, service revenue, and interest revenue

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16
Q

Inventory

A

Goods available for sale to customers.

service companies dont have it.

includes both finalized and unfinished goods.

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17
Q

Accounts receivable

A

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

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18
Q

Expenses

A

cost of assets consumed or services used in the process of generating revenues. (cost of goods sold, selling, marketing, administrative, interest, and income taxes expense).

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19
Q

Liabilities arising from expenses

A

accounts payable, interest payable, wages payable, sales taxes payable, and income taxes payable.

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20
Q

Net income

A

The amount by which revenues exceed expenses.

Is tranferred from income statement to retained earnings to determine the ending balance in retained earnings.

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21
Q

Net loss

A

The amount by which expenses exceed revenues.

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22
Q

types of financial statements

A

Income Statement

Retained Earnings Statement

Balance Sheet

Statement of Cash Flows

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23
Q

The primary types of financial statements required by International Financial Reporting Standards (IFRS) and U.S. generally accepted accounting principles (GAAP) are

A

same

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24
Q

what does income statement include

A

Reports revenues and expenses for a specific period of time.

Net income

Net loss

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25
Past net income provides information for
predicting future net income.
26
The income statement include
the company, the type of statement, the time period covered. Sometimes, another line indicates the unit of measure, e.g., “in thousands” or “in millions.”
27
sole proprietorship
A business owned by one person simple to stablish-No legal procedure high individual control tax advantage (only income tax) business and individual are same entity liable to being personally suied high risk cannot be inherited or sold e.g barber shops, law offi ces, and auto repair shops
28
Types of risk
financial operational legal
29
partnership
often formed because one individual does not have enough economic resources to initiate or expand the business. easy to stablish- may need partnership agreement but not lawers 2 or more individuals make the business shared control advantage of different skills shared expenses tax advantage (only income tax) e.g. Retail and service-type businesses, including professional practices (lawyers, doctors, architects, and certifi ed public accountants)
30
corporation
defenition: A business organized as a separate legal entity owned by stockholders is a corporations. company has legal right has shareholders and can sell shares hard to set-up easier to transfer ownership easier to rais funds no personal liability
31
Users of financial statement
internal: whoever works for company specially managers external: including investors and shareholders
32
All businesses involve in three types of activity
financing: to raise money investing: purchase of the resources a company needs in order to operate. getting long term assets (more than 1 year assets) operating: running the business. service or goods. accounting tracks all these.
33
sources of outside funds
borrowing (debt) selling shares of stock (equity) or in general finding investors to invest in your company
34
liabilities
amount owned
35
creditors
note payable: short-term loans bond payable: long-term loans. definition: borrow directly from investors by issuing debt securities. only public companies. bonds are loan contracts.
36
hybrid businesses
combine the tax advantages of partnerships with the limited liability of corporations. Probably the most common among these hybrids types are limited liability companies (LLCs) and subchapter S corporations.
37
The purpose of financial information
to provide inputs for decision-making.
38
supplies
assets used in day-to-day operations.
39
account receivable account payable
the right to receive money in the future. obligation to pay
40
Income statement
reports a company’s revenues and expenses and resulting net income or net loss for a specific period of time. Shows a companies success. helps users determine if the company’s operations are profitable. Creditors use the income statement to predict future earnings Amounts received from issuing stock are not revenues, and amounts paid out as dividends are not expenses. so, they are not reported on the income statement
41
Income statement
reports a company’s revenues and expenses and resulting net income or net loss for a specific period of time. Shows a companies success. helps users determine if the company’s operations are profitable. Creditors use the income statement to predict future earnings Amounts received from issuing stock are not revenues, and amounts paid out as dividends are not expenses. so, they are not reported on the income statement
42
Retained earnings statement
summarizes the amounts and causes of changes in retained earnings for a specific time period. Retained earnings is the net income retained in the corporation. The time period is the same as that covered by the income statement First line consists of beginning retained earning. Then adds net income and deducts dividends. helps users determine the company’s policy toward dividends and growth. The heading identifies the company, the type of statement, and the time period covered. Ending balance in retained earnings is needed in preparing the balance sheet.
43
Balance sheet
reports the assets and claims to those assets at a specific point in time. shows what the business owns (assets) and what it owes (liabilities) two types of claims to assets: claims of creditors called liabilities and claims of owners called stockholder's equity. Assets = Liabilities + Stockholders’ Equity lists assets first, followed by liabilities and stockholders’ equity helps users determine if the company relies on debt or stockholders’ equity to finance its assets. Stockholders’ equity is comprised of : (1) common stock and (2) retained earnings Creditors analyze a company’s balance sheet to determine the likelihood that they will be repaid.The balance sheet will also be used to evaluate the relationship between debt and stockholders’ equity to determine whether the company has a satisfactory proportion of debt and common stock financing.
44
Statement of cash flows
provides financial information about the cash receipts and cash payments of a business for a specific period of time. shows where the cash was received and how it was used. reports the cash effects of a company’s operating, investing, and financing activities. helps users determine if the company generates enough cash from operations to fund its investing activities. shows the net increase or decrease in cash during the period, and the amount of cash at the end of the period. provides answers to: * Where did cash come from during the period? * How was cash used during the period? * What was the change in the cash balance during the period? The heading of this statement identifi es the company, the type of statement, and the time period covered by the statement.
45
International Financial Reporting Standards (IFRS) U.S Generally Accepted Accounting Principles (GAAP)
use same primary types of financial statements. Neither is very specific regarding format of statements. In practice some differences exist.
46
basic accounting equation
Assets = Liabilities + Stockholders’ Equity
47
cash
most important resource
48
Main lines in statement of cash flows
Cash flows from operating activities Cash flows from investing activities Cash flows from fi nancing activities Net increase in cash Cash at beginning of period Cash at end of period
49
Main lines in balance sheet
Assets (+Total assets) Liabilities and Stockholders’ Equity (+Total liabilities and stockholders’ equity)
50
Main lines in retained earnings statement
Retained earnings, x/x/x (previous) Add: Net income Less: Dividends Retained earnings, x/x/x (end of this accounting period)
51
Main lines of income statement
Revenues Expenses Net income
52
relationship of statements
net income goes from income statement to retained earning retained earning amount from the retained earning statement goes to the ballance sheet. The ending amount of cash shown on the statement of cash flows must agree with the amount of cash on the balance sheet.
53
relationship of statements
net income goes from income statement to retained earning retained earning amount from the retained earning statement goes to the ballance sheet. The ending amount of cash shown on the statement of cash flows must agree with the amount of cash on the balance sheet.
54
Company annual reports include
Financial statements. Management discussion and analysis. Notes to the financial statements. Auditor's report. (all are necessary)
55
Management discussion and analysis (MD&A)
A section of the annual report that presents management’s views on the company’s results of operations and ability to pay near-term obligations, fund operations and expansion. Management must highlight favorable or unfavorable trends and identify significant events and uncertainties that affect these three factors (mentioned at the paragraph above). This discussion obviously involves a number of subjective estimates and opinions.
56
Notes to the financial statements
Notes clarify information presented in the financial statements and provide additional detail. Explanatory notes and supporting schedules. integral part of the financial statements does not have to be quantifi able (numeric) e.g. descriptions of the significant accounting policies and methods used in preparing the statements, explanations of uncertainties and contingencies, and statistics and details too voluminous to be included in the statements.
57
Auditor's report
states 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. prepared by an independent outside auditor If auditor is satisfied he expresses an unqualified opinion. anything els is suspicous.
58
Certified public accountant (CPA)
An individual who has met certain criteria and is thus allowed to perform audits of corporations.
59
Certified public accountant (CPA)
An individual who has met certain criteria and is thus allowed to perform audits of corporations.
60
unethical financial reporting results in
economy would suffer if investors lost confidence in corporate accounting
61
examples of expenses
Salaries and wages Rent Supplies Depreciation Interest Insurance
62
examples of assets in ballance sheet
Cash Accounts receivable Supplies Prepaid insurance Equipment, net
63
examples of liabilities in ballance sheet
Notes payable Accounts payable Unearned service revenue Salaries and wages payable Interest payable
64
examples of items in statement of cash flows
Cash flows from operating activities Cash receipts from operating activities Cash payments for operating activities Net cash provided by operating activities Cash flows from investing activities Purchased equipment Net cash used by investing activities Cash flows from financing activities Issuance of common stock Issued note payable Payment of dividend Net cash provided by financing activities Net increase in cash Cash at beginning of period Cash at end of period
65
examples of items in statement of cash flows
Cash flows from operating activities Cash receipts from operating activities Cash payments for operating activities Net cash provided by operating activities Cash flows from investing activities Purchased equipment Net cash used by investing activities Cash flows from financing activities Issuance of common stock Issued note payable Payment of dividend Net cash provided by financing activities Net increase in cash Cash at beginning of period Cash at end of period
66
equipment goes to which statement
equipment to ballance sheet equipment expense to income statement
67
equipment goes to which statement
equipment to ballance sheet equipment expense to income statement
68
good students
marzieh Navayi jasmeet singh insha akhtar
69
order of items in income statement
cash account receivables inventory prepaid expense
70
how often do we have to provide the public with financial report according to law
every year
71
how often do we have to provide the public with financial report according to law
every year
72
what should we do before interview
go to company website download annual report and read mda report