Section 1 Flashcards by tallulah s

3 kinds of business

manufacturing
merchandising
service

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2 kinds of merchandising

retail

wholesale

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3 elements to start a successful business

management skill
idea
capital

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management skill

the ability to effectively employ resources and produce a profit

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capital

money or resources to bring a product or service to life

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a good idea

a product or service that can be sold at a profit

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2 ways to access capital

debt or equity financing

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debt financing

borrowing from lenders or creditors

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equity financing

contributions from investors or owners

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financing has to do with how

capital is obtained for a business

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accounting

the language of business

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3 characteristics of debt financing

borrowed resources must be repaid
consequences of failure to repay can be harsh
can be difficult to qualify for

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2 characteristics of equity financing

investors contribute resources/captial in exchange for ownership interests
investor contributions of resources are not subject to repayment

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ownership grants what 3 rights?

right to vote or have a say
right to share in profits
right to share in remaining resources if business terminates

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key advantage of debt financing

no sacrifice of ownership rights

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key advantage of equity financing

no requirement to repay capital contributions

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2 ways an owner gets their investment back

distribution upon discontinuance

2. subsequent sale of ownership interests to other investors

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3 ways investors make a profit/loss on investment

sharing in the business operating profits through dividends
capital gains or losses on the sale of stock
distributions if the business is terminated

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the primary purpose of financial accounting

provide info that assists investors and creditors in evaluating a company’s

credit worthiness
profit potential

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financial accounting provides (4)

HISTORICAL info
to CREDITORS and POTENTIAL INVESTORS
outside of management
about the company’s FINANCIAL POSITION and RESULTS OF OPERATIONS

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managerial accounting provides

info that assists managers in the effective operation of a business
more detailed reports
not publicly available
used to improve FUTURE performance

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3 general purpose financial statements

Balance Sheet
Income Statement
Cash flow Statement

financial statements are found

in a company’s annual report

2 critical conditions that must exist for financial statements to be truly useful

comparability

2. credibility

GAAP

generally accepted accounting principles

FASB

financial accounting standards board

what is credibility?

providing financial info that is materially accurate and reliable

the company’s management is responsible for

- a company’s accounting system | - the prep of its financial statements

what does the SEC do?

regulates stock and bond transactions

AICPA

american institute of cpa’s

name 2 functions of the AICPA

1. license and certify CPA’s | 2. establish rules of how to conduct an audit

GAAP was established by

the FASB

EPS

earnings per share

How do we know what the profit is?

earnings per share

GAAP establishes

rules of accounting and disclosure

T/F IASB has no regulatory authority

true

IFRS

international financial reporting standards

An external auditor’s report on financial statements expresses an opinion

1. as to the fairness of the financial statements | 2. as to compliance with GAAP

A company’s annual report provided to the public will typically include

1. an explanation fr management summarizing the company’s operating results 2. an external auditor’s report on the financial statements 3. notes to the finanacial statements providing supplemental info

The professional organization for certified public accountants in the US is

the American Institute of Certified Public Accountants AICPA

T/F Company stock values are influenced most significantly by investors’ changing expectations of a company’s future earnings

true

T/F the primary purpose of financial accounting is to communicate info to the managers of a business

false

a disadvantage of the corporate form of business ownership is

possible double income taxation on profits distributed to the company owners

T/F the Novo Mercado is a Brazilian stock market that has been proposed primarily for the listing of foreign stocks (non-Brazilian in order to make investment in such companies more accessible to Brazilian investors

False, it is for the listing of Brazilian companies to attract foreign investors and capital to Brazil

T/F the SEC is considering the allowance of international accounting standards for companies wishing to access US capital markets, but such a policy is opposed by the the FASB and many US corporations

true

T/F the IASB is a London based organization that has been established to require and enforce the use of international accounting standards in countries receiving funds through the IMF

False

the prep and accuracy of a company’s financial statements and compliance with GAAP is primarily the responsibility of the company’s

management

T/F stock selling at a low P/E ratio is more characteristic of a growing company than one that has stabilized earnings

false

What is P/E ratio?

it shows the relationship of a company’s stock price relative to its earnings

t/f a sporting goods store in the local mall is an example of a merchandising business

true

when P/E ratio of a company is low relative to its earning

there is not a significant expectaton of future earnings growth

Why does high growth company stock sell at a higher PE ratio

because people are willing to pay higher prices to own the stock of companies for which higher eanings are anticipated or hoped for

financial accounting provides

information to investors and creditors

GAAP applies to what type of accounting

financial accounting