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1

Accounting definition

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Self proprietorship

A business owned by one person

ex. A small owner-operated barber shop

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Partnership

A business owned by two or more persons associated as partners

often because indivdual lacks sufficient economic resources

ex. lawyers, artchitects, CPAs

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Corporation

A business organized as a seperate legal entity owned by stockholders

Investors receive shares of stock to indicate their ownership claim

Ex. NYSE members

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Most of business is done by what?

Most common business is what?

Most of business- corporation

Most common - sel proprietorshipp and partnership

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External users

Creditors/lendors

Private investors

Vendors

Customers

Taxing authorities

Regulators

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Internal users

Managers who plan, organize, and run a business

ex. marketing manager, production supervisor, finance director, company officer

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Investors

Use accounting information to make decisions to buy, hold, or sell stock

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Creditors

Use accounting information to evaluate the risks of selling on credit or lending money

external user

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Specific examples of external users

Taxing authorities

Customers

Labor unions

Regulatory Agencies

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Ethics in financial reporting

Regulators and lawmakers concerned that the conomy would suffer if investors lost confidence in corporate accounting due to unethical financial reporting

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3 business activities

Financing

Investing

Operating

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Creditors

Persons or entities to whom a company owes money

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Liabilities

Amonts owed to creditors

Have the legal right to be paid according to pre-determined schedule

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Common stock

Total amount paid in by stockholders for the shares they purchase

Investors have no legal right to corporate cash until claims of creditors are satisfied

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Dividends

Payments to stockholders

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Two financing activities

1. Borrow money

2. Issue (sell) shares of stock

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Investing activities

Involves the purchase of resources a company needs in order to operate

buying of LONG TERM assets

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Assets

Resources owned by a business

Eg. property, plant, and equipment, investments, cash

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Revenue

The increase in assets resulting from the sale of a product or service in the normal course of business

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Inventory

Goods (assets) available for future sales to customers

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Account receivable

right to receive money in the future

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Expenses

The costs of assets consumed or services used in the process of generating revenues

es. cost of goods sold, selling expenses, marketing expenses, administrative expenses

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Accounts payable

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Operating activities

Revenue

Inventory

Account receivable

Expenses

Accounts payable

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Net income = 

Revenues > expenses

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Net loss =

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4 financial statements (in order)

IRBS

1. Income statement

2. Retained Earnings statement

3. Balance Sheet

4. Statement of Cash Flows

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Income statement

Reports the successes or failures of the company's operations for a period of time

Investors and creditors are interested in past income to predict future income

- relates to a company's stock price

-helps creditors determine if company has ability to repay in the future

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Retained Earnings Statement

Shows the amounts and causes of changes in retained earnings during the period

Allows users to evaluate the dividend payment practices

-investors may prefer high or low dividend payouts

-creditors take notice because dividends reduce ability to repay debts

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Retained earnings

The net income retained in the corporation

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Balance Sheet

Reports assets and claims to assets at a specific point in time

2 types of claims

1. liabilties (claims of creditors)

2. Claims of owners ( stockholder's equity)

Assets = liabilities + stockholders' equity

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Basic Accounting Equation

Assets = liabilities + stockholders' equity

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Statement of Cash Flows

Provide financial information about the cash receipts and cash payments of a business for a specific period of time

Reports cash effects of a company's operating, investing, and financing activities as well as net increase or decrease in cash

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Questions statement of Cash Flows answers

Where did the cash come from?

How was the cash used during the period?

What was the change in the cash blance during the period?

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Annual Report

Publicly traded companies MUST provide an annual report

Include:

Financial statements

MD&A

Notes to financial statements

Independent Auditor's Report

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Management Discussion & Analysis

Includes:

Ability to pay near-term obligations

Ability to fund operations and expansion

Its results of operations

*SEVERAL SUBJECTIVE STATEMENTS AND OPINIONS

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Notes to the Financial Statements

Clarify the financial statements and provide additional detail

Info not all quantifiable

-descriptions of policies and methods

INTEGRAL

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Auditor's Report

Independent outside auditor peforms it

States auditor's opinion as to the fairness of the statements

auditor's must have CPA

Unqualified opinion- financial statements are fair

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Unqualified opinion

Issued when the auditor is satisfied that the financial statements provide a fair representation of the company's financial position and results of operations are in accordance with GAAP

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Why so much in annual report?

Not all relevant info in financial statements

Users are interested in non-financial info

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IFRS properties

Principles based

Developed by the International accounting Standards Board (IASB)

Non-US companies to not have to comply with SOX

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U.S. GAAP properties

Rules based

Developed by the Financial accounting standards board (FASB)

SOX applies to large public companies on U.S. exchanges

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