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chapter one notes Flashcards

1
Q

sole proprietorship

A

one owner
(separate entity for accounting)
(not a separate entity for tax)

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2
Q

partnership

A

two or more owners
(separate entity for accounting)
(not a separate entity for tax)

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3
Q

corporation

A

many stockholders/shareholders

separate entity for accounting and tax

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4
Q

what are the advantages of a sole proprietorship?

A

easy to form

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5
Q

what are the disadvantages of a sole proprietorship?

A

“unlimited liability”

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6
Q

what are the disadvantages of a partnership?

A

“unlimited liability”

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7
Q

what are the advantages of a corporation?

A

limited liability
continuity of life
ease in transfer of ownership
opportunity to raise large capital through stock

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8
Q

what are the disadvantages of a corporation?

A

double taxation

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9
Q

double taxation

A

dividends are taxed on personal returns as well as on the corporation’s return

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10
Q

what are the three business activities?

A

financing
investing
operating

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11
Q

financing

A

how a company pays for growth/expansion

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12
Q

what are the two ways to finance?

A 
borrowing (liabilities)
selling ownership (stock)
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13
Q

borrowing

A

temporary form of financing

you have to pay it back

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14
Q

selling ownership

A

permanent form of financing

you don’t have to pay it back

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15
Q

investing

A 
purchasing resources (assets) to be used in day-to-day operations 
LONG TERM ASSETS
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16
Q

operating

A

activities that earn revenue and generate expenses (day-to-day activities)

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17
Q

what is the purpose of accounting?

A

to identify, measure, and communicate information about a company that is useful in making economic decisions

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18
Q

information system of accounting

A

decision maker->(analyze)
transaction occurs->
accounting records->(recording or book keeping)
4 standardized financial statements->(summarize)
decision maker (again)

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19
Q

internal users

A

management of a company

ex: payroll is needed

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20
Q

management accounting

A

limited only by the extent of data available and the cost involved in generating the information

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21
Q

external users

A

those not directly involved in the operations of a business

ex: financial statements are needed

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22
Q

financial accounting

A

limited by the presentation of information by the company’s management

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23
Q

balance sheet

A

shows the financial position of the company AT A SINGLE POINT IN TIME
“snapshot”

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24
Q

accounting equation

A

assets=liabilities+stockholder’s equity

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25
assets
resources that will produce a future economic benefit
26
liabilities
debts owed to creditors, suppliers, employees, customers | "payable"
27
equity
financing provided by owners and operations of the company
28
common stock
investments made by owners
29
retained earnings
cumulative earnings of the company that have been retained (reinvested in the company)
30
statement of retained earnings
shows how net income and dividends cause change in.a company's financial position during a period of time
31
retained earnings equation
beginning retained earnings +net income -dividends
32
net income equation
revenues-expenses
33
statement of cash flows
shows the actual change in cash of a company for a period of time
34
equation for cash flows
cash flows from operating, investing, and financing activities+cash at the beginning of the period
35
what is the order in which you prepare financial statements?
income statement statement of retained earnings balance sheet statement of cash flows
36
footnotes
give added details necessary to under financial conditions a company
37
what is the basic objective of financial reporting?
to provide economic information about a company that is useful in making an "informed decision"
38
"informed decision"
the investor/creditor/supplier wants to be able to analyze the financial statements to determine the amounts, timing and uncertainty of future cash flows
39
what are the underlying assumptions of accounting help the decision maker to understand what accounting information reports as well as inherent limitations?
``` economic entity going concern monetary unit time period assumption cost principle ```
40
economic entity
business transactions are separate from the personal transactions of the owners
41
going concern
company will continue to operate into the foreseeable future without forced liquidation
42
monetary unit
all information will be measured in its national currency | done in monetary unit of the country it is traded in
43
time period assumption
the long life of a company can be reported over a series of shorter time periods
44
cost principle
assets are recorded at original cost (what we paid for them)
45
do we record costs as historical or current?
we keep assets recorded at historical costs until we get rid of them (otherwise its subjective)
46
what are the measurement rules?
general accepted accounting principles (GAAP)
47
generally accepted accounting principles (GAAP)
a common set of "rules" used to report US financial statements
48
financial accounting standards board (FASB)
private sector body given responsibility to develop GAAP
49
securities and exchange commission (SEC)
a federal (government) agency that has broad powers to prescribe accounting practices and standards to public companies that trade securities on the major exchanges (NYSE and NASDAQ)
50
what special privileges does the SEC have?
the SEC can influence or override any FASB ruling "checks and balances"
51
american institute of certified public accountants (AICPA)
professional organization go certified public accounts | not considered "direct" influence
52
international accounting standards board (IASB)
working towards a convergence of international reporting standards (IFRS) and GAAP
53
global differences in accounting standards
some IFRS principles differ from GAAP ex: accounting for inventories, accounting for losses on income statement, accounting for PPE (property, plant, and equipment), accounting for research and development
54
public company accounting oversight board
five member body that sets auditing standards (set responsibility)
55
what is management's responsibility?
accuracy
56
what are the auditor's responsibility?
to attest to the fairness
57
what makes information useful?
if it is relevant and reliable
58
relevance
information makes a difference in decision making
59
reliability/accurate
verifiable representational faithfulness neutral
60
verifiable
free from error | have "backup"
61
representational faithfulness
numbers represent what really happened in the business; factual
62
neutral
free from bias
63
decision makers should:
1. be aware of ethical conflicts 2. ask questions, do research 3. be aware of pressures to make choices that are not in best interest
64
decision making model:
1. recognize an ethical dilemma 2. analyze key elements in a situation 3. list alternatives and evaluate impact of each 4. select best alternative
65
when was the sarbanes-oxley act passed?
2002
66
why was the sarbanes-oxley act passed?
to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals
67
what was the result of the sarbanes-oxley act?
1. management must now certify the accuracy 2. severe penalties for fraudulent activity 3. auditors must be independent 4. increased responsibility of board of directors
68
what were some of the accounting scandals uncovered in the early 2000s?
Enron, Tyco, Worldcom, Athur Anderson
69
who sponsored the sarbanes-oxley act?
senator Paul Sarbanes of Maryland and congressman Michael Oxley of Ohio
70
what are the management provisions of the sarbanes-oxley act?
1. report effectiveness of internal control 2. code of ethics 3. CEO and CFO must certify (penalties if inaccurate) 4. whistle-blower protection
71
whistle-blower protection
firms must provide a mechanism for anonymous reporting of fraudulent activities in the company
72
what are the board of directors provisions of the sarbanes-oxley act?
1. some directors are required to be independent of management 2. audit committee must be independent of management
73
what are the external auditors provisions of the sarbanes-oxley act?
1. you cannot consult AND audit | 2. report to audit committee not management
74
what are the enforcement provisions of the sarbanes-oxley act?
1. Public Company Accounting Oversight Board can regulate auditing firms 2. all accounting firms must register with the PCAOB

ACCT 229 (11 decks)

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