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Flashcards in Final Deck (83):
1

different types of business entities

sole proprietorship, corporation, partnership, limited-liability company (LLC)

2

sole proprietorship

  • business has single owner
  • legally, business is not separate form owner
    • owner is personally liable for business debts
  • for accounting, business records are kept separate from personal records

3

partnership

  • 2+ owners
  • each partner is personally liable for business debts
    • could be risky

4

limited liability companies (LLCs)

  • owners are called members
  • members aren't personally liable for business debts
    • reduces owners' risk

5

corporations

  • owners are stockholders
    • stockholders elect Board of Directors
      • Board sets policy & appoint officers
    • stockholders not personally liable for corporate debts
  • formed under state law
    •  pay income taxes
  • legally distinct from owners

6

stockholder's equity

assets - liabilities

7

authorized shares

max # of shares a company can issues as indicated in its charter

8

issued shares

# of shares a company has sold to shareholders

9

outstanding shares

# of shares currently in shareholders' possession

any difference btwn issued & outstanding is due to treasury stock

10

common stock

  • basic form of common stock
  • have rights of ownership
  • benefit most if company succeeds
  • risk most if company doesn't succeed

11

preferred stock

  • have preference in receving dividends & assets in case of liquidation
  • hybrid btwn common stock & debt
  • rare for corporations to issue

12

stockholders' rights

  • vote @ stockholder meetings
  • receive dividends
  • receive share if corporation liquidates
  • maintain proportionate ownership
    • preemptive right

13

journal entry for common stock @ par

100,000 shares @ $5 par value

the common stock account is always credited in the amt of the shares issued x par value

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14

journal entry for common stock above par

100,000 shares of $5 par value for $12/share

amt above par is credited to paid-in capital in excess of par

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15

treasury stock

company's own stock that it has issued & later reacquired

  • all authorized shares have been issued & shares are needed for employee stock purchase plans
  • company wants to purchase its shares @ a low price & then re-issue them @ higher price
  • management wants to avoid a takeover

16

accounting for treasury stock

recorded @ cost (not par value)

contra-equity account (debit balance)

reduces stockholders' equity & assets

if sold above, paid-in capital from treasury stock transactions is credited

17

dividends

distribution to stockholders

3 forms: cash, stock, noncash assets

18

dividend dates

date of declaration

date of record

date of payment

19

date of declaration

board of directors announces dividend

corporation is now obligated to pay

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20

date of record

stockholders who own shares on this date will receive dividend

21

date of payment

payment sent to shareholders on record

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22

benefits of preferred stock

preferred shareholders receive dividends before common shareholders

23

par value

  • arbitrary amt assigned to share of stock
  • in most states, represents min price for shares
    • legal capital

24

no-par stock

  • doesn't have a par value
  • may have stated value

25

available-for-sale investments

  • initially recorded @ cost
  • cash dividends received are recorded as revenue
    • stock dividends indicated by memorandum
  • reported @ market value on balance sheet
    • considered more relevant for decision making

26

valuing investments @ year-end

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27

unrealized gain/loss

reported on both income statement & balance sheet

  • income statement
    • other comprehensive income - separate section below net income
  • balance sheet
    • accumulated other comprehensive income - separate section of stockholders' equity

don't impact net income

28

long-term bond investments

  • major investors
    • financial institutions
    • insurance companies
  • called held-to-maturity investments
  • reported @ amortized cost
    • bonds carrying amt is amortized to face value @ maturity cost

29

accounting methods for long-term investments

available-for-sale

equity method

consolidation

30

up to 20% owned by investor

use available-for-sale method

31

20 - 50% owned by investor

use equity method

32

more than 50% owned by investor

use consolidation method

33

equity method

  • investor has significant influence over investee
  • investment recorded @ cost
  • investment is increased by investee earnings
  • investment in decreased by investee dividends

34

consolidation subsidiaries

  • investor controls investee
  • investor is called parent company
  • investee is called subsidiary (sub)
  • financial statements of a parent & its subsidiaries are combined
    • consolidated as if 1 company

35

income from continuing operations

  • day-to-day normal business activities
  • includes
    • revenues & operating expenses
    • gains & losses
    • income tax expense
  • can help predict future annual income

36

discontinued operations

  • company sells a segment of the business
    • identifiable part of business
  • reported beneath income from continuing operations
    • net of income taxes
  • not considering in predictions of future earnings

37

extraordinary items

  • gains & losses that are both infrequent & unusual
  • include losses from natural disasters & expropriation of assets by foreign govts
  • do NOT include gains/losses from lawsuits, restructuring/sale of plant assets
  • reported after continuing operations net of income taxes

38

change in accounting method

  • change from FIFO to LIFO
  • change from straight-line depreciation to double-declining balance
  • makes difficult to compare year-to-year statements
  • reported in special section usually after extraordinary items

39

earnings per share (EPS)

  • key measure of company's success

net income - preferred dividends

___________________________________

avg # of common shares outstanding

  • reported for each element of net income: discontinued operations, extraordinary items, etc.
  • preferred dividends only subtracted for continuing operations & net income

40

auditor's report

  • companies hired CPAs to examine financial statements
    • examination is called an external audit
    • CPAs are to be indepdendent of the company they're auditing
  • CPA firm issues audit reports
    • provide opinion if financial statements are in accordance w/ GAAP/not

41

types of audit reports

unqualified

qualified

adverse

disclaimer

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unqualified audit report

clear opinion; statements are fairly represented

43

qualified audit report

"except for" opinion; statements are reliable except for 1/more items

44

adverse audit report

statements are unreliable & not in accordance w/ GAAP

45

disclaimer audit report

no opinion; auditor was unable to form an opinion

46

cash flow statement

  • shows cash receipts & payments during a period
  • purposes
    • predicts future cash flows
    • evaluated management decisions
    • determines ability to pay dividends & interest
    • shows relationship of net income to cash flows

47

3 cash flow categories

operating activities

investing activities

financing activities

48

operating activities

related to the transactions that result in net income

most important as they reflect core of the business

49

investing activities

related to long-term assets

how a company uses its resources in the long-term

50

financing activities

related to long-term debt & equity

how a company obtains resources

51

net realizable value

amt of cash a company expects to realize/receive in cash receipts

52

depreciation

cost of a plant asset over its useful life

53

disposal of property/plant/equipment

can be discarded, sold, or exchanged

54

discarding plant asset

  • accumulated depreciation & cost of asset removed from records
  • loss recorded (unless asset is fully depreciated & no residual value)

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55

selling a plant asset

  • if cash received > book value
    • gain
    • income statement account
    • similar to revenue
    • increases net income
  • if cash received < book value
    • loss
    • income statement account
    • similar to an expense
    • decreases net income

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56

market interest rate

rate investors demand for loaning money; changes frequently

57

stated interest rate

printed on the bond certificate; determines amt of cash interest; remains constant

58

bond premium

issue price above face value

stated rate of interest is greater than market interest

59

bond discount

issue price below face value

stated rate of interest is less than market rate of interest

60

GAAP

Generally Accepted Accounting Principles

formulated by the Financial Accounting Standards Board (FASB)

  • accounting should be
    • relevant
    • reliable
    • comparable
    • consistent

61

FASB

Financial Accounting Standards Board

62

SEC

Securities & Exchange Commission

Securities Exchange Act of 1934 requires companies that issue their stock publicly to file audited financial statements w/ the SEC

63

accounting equation

assets = liabilities + (common stock + revenues - expenses - dividends)

(owner's equity)

64

assets

increased by debits

decreased by credits

65

liabilities

decreased by debits

increased by credits

66

common stock

decreased by debits

increased by credits

67

revenues

decreased by debits

increased by credits

68

expenses

increased by debits

decreased by credits

69

dividends

increased by debits

decreased by credits

70

stockholder's equity

decreased by debits

increased by credits

71

retained earnings

decreased by debits

increased by credits

72

accounts receivable

on balance sheet

current asset

73

revenues

does not equal cash

earned by providing goods/services

74

expenses

does not equal cash

costs of operating a business

75

accrual based accounting

  • records business transactions when they occur
    • when sale is made
    • when bill is received
  • copmlies w/ GAAP
  • presents accurate financial picture

76

cash-based accounting

  • records transactions only when cash is received/paid
    • when customer pays for product/service
    • when bills are paid
  • only used by very small business
  • omits important info

77

adjustment process

  • at the end of the period, a business prepares financial statements
  • ensures that
    • all revenue that has been earned has been recorded
    • all expenses that have been incurred are matched to revenues
    • asset & liability accounts are up-to-date

78

closing the books

  • done after financial statements are prepared
  • set temporary accounts to zero
  • transfers balances to retained earnings account
  • journalized activity in Statement of Retained Earnings
  • close RED
    • debit each Revenue account for the amount in its credit balance
      • retained earnings is credited
    • credit each Expense account for the amount in its debit balance
      • retained earnings is debited
    • credit Dividends for the amount in its debit balance
      • retained earnings is debited

79

order of financial statements

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80

temporary accounts

  • revenues, expenses, & dividends
  • closed
  • balances represent a period of time

81

permanent accounts

  • asset, liability, & equity accounts
  • not closed
  • ending balance of one period carriers over to following period

82

LIFO

newest items are assumed to be sold first

ending inventory consists of oldest items in inventory

high COGS

low ending inventory

tax advantage: higher COGS -> lower net income -> lower taxes -> greater cash flow

balance sheet: old, outdated costs

income statement: matches current costs w/ revenue

83

FIFO

oldest items assumed to be sold 1st

ending inventory will consist of most recent items purchased

low COGS

high ending inventory

balance sheet: more recent costs

income statement: doesn't match current costs w/ revenue