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ACCT 621 > Chapter 1 > Flashcards

Chapter 1 Flashcards

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
Q

Past net income provides information for

A

predicting future net income.

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26
Q

The income statement include

A

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.”

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27
Q

sole proprietorship

A

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

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28
Q

Types of risk

A

financial

operational

legal

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29
Q

partnership

A

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
Q

corporation

A

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
Q

Users of financial statement

A

internal: whoever works for company specially managers
external: including investors and shareholders

32
Q

All businesses involve in three types of activity

A

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
Q

sources of outside funds

A

borrowing (debt)

selling shares of stock (equity) or in general finding investors to invest in your company

34
Q

liabilities

A

amount owned

35
Q

creditors

A

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
Q

hybrid businesses

A

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
Q

The purpose of financial information

A

to provide inputs for decision-making.

38
Q

supplies

A

assets used in day-to-day operations.

39
Q

account receivable

account payable

A

the right to receive money in the future.

obligation to pay

40
Q

Income statement

A

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
Q

Income statement

A

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
Q

Retained earnings statement

A

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
Q

Balance sheet

A

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
Q

Statement of cash flows

A

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
Q

International Financial Reporting Standards (IFRS)

U.S Generally Accepted Accounting Principles (GAAP)

A

use same primary types of financial statements.

Neither is very specific regarding format of statements.

In practice some differences exist.

46
Q

basic accounting equation

A

Assets = Liabilities + Stockholders’ Equity

47
Q

cash

A

most important resource

48
Q

Main lines in statement of cash flows

A

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
Q

Main lines in balance sheet

A

Assets (+Total assets)

Liabilities and Stockholders’ Equity (+Total liabilities and stockholders’ equity)

50
Q

Main lines in retained earnings statement

A

Retained earnings, x/x/x (previous)

Add: Net income

Less: Dividends

Retained earnings, x/x/x (end of this accounting period)

51
Q

Main lines of income statement

A

Revenues

Expenses

Net income

52
Q

relationship of statements

A

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
Q

relationship of statements

A

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
Q

Company annual reports include

A

Financial statements.

Management discussion and analysis.

Notes to the financial statements.

Auditor’s report. (all are necessary)

55
Q

Management discussion and analysis (MD&A)

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
Q

Notes to the financial statements

A

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
Q

Auditor’s report

A

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
Q

Certified public accountant (CPA)

A

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

59
Q

Certified public accountant (CPA)

A

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

60
Q

unethical financial reporting results in

A

economy would suffer if investors lost confidence in corporate accounting

61
Q

examples of expenses

A

Salaries and wages

Rent

Supplies

Depreciation

Interest

Insurance

62
Q

examples of assets in ballance sheet

A

Cash

Accounts receivable

Supplies

Prepaid insurance

Equipment, net

63
Q

examples of liabilities in ballance sheet

A

Notes payable

Accounts payable

Unearned service revenue

Salaries and wages payable

Interest payable

64
Q

examples of items in statement of cash flows

A

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
Q

examples of items in statement of cash flows

A

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
Q

equipment goes to which statement

A

equipment to ballance sheet

equipment expense to income statement

67
Q

equipment goes to which statement

A

equipment to ballance sheet

equipment expense to income statement

68
Q

good students

A

marzieh Navayi

jasmeet singh

insha akhtar

69
Q

order of items in income statement

A

cash

account receivables

inventory

prepaid expense

70
Q

how often do we have to provide the public with financial report according to law

A

every year

71
Q

how often do we have to provide the public with financial report according to law

A

every year

72
Q

what should we do before interview

A

go to company website download annual report and read mda report

ACCT 621 (3 decks)

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