Financial statements
Business documents that companies use to report the results of their activities to various user groups, which can include managers, investors, creditors, and regulatory agencies.
Individuals, investors and creditors, regulatory bodies, non profit organizations.
Who uses accounting information?
Financial and management.
What are the two types of accounting?
Accounting
Measures business activities, processes data into reports, and communicates results to decision makers.
Financial Accounting
Financial accounting provides information for decision makers outside the entity, such as investors, creditors, government agencies, and the public. This information must be relevant for the needs of decision makers and must faithfully give an accurate pi
Management Accounting
Provides information for managers. Examples of management accounting information include budgets, forecasts, and projections that are used in making strategic decisions of the entity.
Proprietorship, partnership, limited-liability company (LLC), corporation.
Business generally takes one of the following forms:
One owner
Proprietorship has how many owners?
Two or more owners
Partnership has how many owners?
Members
In an LLC, owners are:
Many
Corporations have how many owners?
Proprietor is personally liable.
What is the personal liability of owner(s) for business debts in a proprietorship?
General partners are personally liable; limited partners are not.
What is the personal liability of owner(s) for business debts in a partnership?
Members are not personally liable.
What is the personal liability of owner(s) for business debts in an LLC
Stockholders are not personally liable.
What is the personal liability of owner(s) for business debts in a corporation
Proprietorships
Tends to be small retail stores or solo providers of professional services�physicians, attorneys, or accountants.
Partnership
Has two or more parties as co-owners, and each owner is a partner.
Limited-liability partnership
A partnership in which a wayward partner cannot create a large liability for the other partners.
up to the extent of his/her investment in the partnership, plus their proportionate share of the liabilities.
In LLPs, each partner is liable for partnership debts only
Limited-liability partnership
LLP stands for
Limited-liability company
LLC stands for
Limited-liablity company
The business (and not the owner) is liable for the company's debts in a:
Members
An LLC may have one owner or many owners, called what?
False
True or False: Members of an LLC have unlimited liability for the LLC's debts
True
True or False: An LLC pays no business income tax.
Corporation
A business owned by the stockholders, or shareholders, who own stock representing shares of ownership in the corporation.
Corporation (Corp.), Incorporated (Inc.), or Company (Co.)
Corporations' full names include:
True
True or False: Stockholders of a corporation have limited liability
True
True or False: A corporation pays a business income tax as well as many other types of taxes.
Double taxation of distributed profits
When the shareholders of a corporation are effectively taxed twice on distributions received from the corporation (called dividends).
Dividends
Distributions received from the corporation.
The stockholders
Ultimate control of a corporation rests with who?
Board of directors
Who sets policies and appoints officers?
Generally accepted accounting principles
GAAP stands for
GAAP or generally accepted accounting principles are
Professional guidelines for measurement and disclosure of financial information.
Financial Accounting Standards Board
FASB stands for
International Accounting Standards Board
IASB stands for
International Financial Reporting Standards
IFRS stands for
Investors and creditors
The two basic types of external providers of capital include:
Relevance and faithful representation
The fundamental qualitative characteristics of information include:
Relevant
To be ______, information must be capable of making a difference to the decision maker, having predictive or confirming value.
Faithfully represent
To _______ _______, the information must be complete, neutral (free from bias), and without material error (accurate).
Reliable
Faithful representation makes the information _____ to users
Comparability, verifiability, timeliness, and understandability
The enhancing qualitative characteristics of information include:
Comparability
The accounting information for a company must be prepared in such a way as to be capable of being both compared with information from other companies in the same period, and consistent with similar information for that company in previous periods.
Verifiability
The information must be capable of being checked for accuracy, completeness, and reliability.
Auditors
The process of verifying information is often done by internal and external _____.
Timeliness
The information must be made available to users early enough to help them make decisions, thus making the information more relevant to their needs.
Information must be sufficiently transparent so that it makes sense to reasonably informed users of the information.
Understandability
Materiality and cost
Constraints of accounting information include:
Materiality
The information must be important enough to the informed user so that, if it were omitted or erroneous, it would make a difference in the user's decision.
True
True or False: Material information needs to be separately disclosed in the financial statements.
Entity
Any organization that stands apart as a separate economic unit.
Continuity (going-concern) assumption
In measuring and reporting accounting information, we assume that the entity will continue to operate long enough to use existing assets�land, buildings, equipment, and supplies�for its intended purposes.
Continuity assumption
The _____ _____ says that a business should stay in business long enough to recover the cost of those assets by allocating that cost through a process called depreciation to business operations over the assets' economic lives.
The historical cost principle
States that assets should be recorded at their actual cost, measured on the date of purchase as the amount of cash paid plus the dollar value of all non-cash consideration (other assets, privileges, or rights) also given in exchange.
Fair value
The amount that the business could sell the asset for, or the amount that the business could pay to settle the liability.
Inflation
A rise in the general price level is called _____.
Stable-monetary-unit assumption
Under the _____-_____-_____ _____, accountants assume that the dollar's purchasing power is stable over time.
Assets and liabilities, and owners' equity
The elements of financial statements are:
Assets = Liabilities + Owners' Equity
Accounting equation
Assets
Economic resources that are expected to produce a benefit in the future.
Liabilities and owners' equity
Claims on assets come from two sources:
True, they are debts that are payable to outsiders, called creditors.
True or False: Liabilities are "outsider claims
Capital or stockholders' equity.
Owners' equity for a corporation is also called:
True
True or False: Owners' equity represents "insider claims
Ownership
Equity means
Assets
Cash and cash equivalents are examples of _____.
False
True or False: Merchandise inventory cannot be considered an asset.
Fixed assets
Property, plant, and equipment are considered _____ _____.
Liability
The word "payable" signifies a _____.
Account payable
An _____ _____ is a liability for goods or services purchased on credit and supported by the credit standing of the purchaser.
Note payable
A _____ _____ is a written promise to pay on a certain date.
Long-term debt
_____-_____ _____ is a liability that's payable beyond one year from the date of the financial statements.
Assets - liabilities = owners' equity
The equation for owners' equity is:
Stockholder's equity
A corporation's equity is called
Paid-in capital and retained earnings
Stockholder's equity has two main subparts:
Assets = liabilities + Stockholders' Equity
Assets = liabilities + Paid-in Capital + Retained Earnings
The equation for a corporation's equity (stockholder's equity)
Paid-in Capital
The amount the stockholders have invested in the corporation.
Common stock
The corporation issues to the stockholders as evidence of their ownership.
False, all corporations have common stock.
True or false: only some corporations have common stock
Retained earnings
The amount earned by income-producing activities and kept for use in the business.
Revenues, expenses, and dividends.
The three major types of transactions that affect retained earnings are:
Revenues
Inflows of resources that increase retained earnings by delivering good or services to customers.
Expenses
Resource outflow that decrease retained earnings due to operations.
Expenses
_____ represent the costs of doing business; they are the opposite of revenues.
Expenses
Goods sold, building rent, salaries, and utility payments are examples of:
Dividends
_____ decrease retained earnings, because they are distributions to stockholders of assets (usually cash) generated by income.
Dividends
Earnings distributed to stockholders
False. Instead of being subtracted from revenues to compute net income, dividends are recorded as direct reductions of retained earnings.
True or false: dividends are expenses and always affect net income.
Net income (or net earnings, or net profit).
When total revenues exceed total expenses, the result is called _____ _____.
Profits
_____ is the excess of revenues over expenses.
Net loss.
When expenses exceed revenues, the result is a _____ _____.
Net income (or net loss)
Revenues - expenses = _____ _____.
$160,000 ($240,000 - $80,000)
If the assets of a business are $240,000 and the liabilities are $80,000, how much is the owners' equity?
$290,000 ($160,000 + $130,000)
If the owners' equity in a business is $160,000 and the liabilities are $130,000, how much are the assets?
Net income of $44,000 ($129,000 - $85,000); revenues - expenses
A company reported monthly revenues of $129,000 and expenses of $85,000. What is the result of operations for the month?
$115,000 [$100,000 beginning balance + net income $25,000 ($75,000 - $50,000) - dividends $10,000]
If the beginning balance of retained earnings is $100,000, revenue is $75,000, expenses total $50,000, and the company pays a $10,000 dividend, what is the ending balance of retained earnings?
Income statement (or statement of operations)
Reports revenues and expenses for the period.
Low
Companies often adopt a fiscal year that ends at the _____ point of their operations.
Revenues and gains, and expenses and losses.
An income statement reports two main categories:
Net income = Total Revenues and Gains - Total Expenses and Losses
How do you measure net income?
Net
In accounting, the word _____ refers to an amount after a subtraction.
Net
_____ income is the profit left over after subtracting expenses and losses from revenues and gains.
True
True or False: Net income is the single most important item in the financial statements.
Net sales
_____ _____ means sales revenue after subtracting all the goods customers have returned to the company.
Retained earnings
_____ _____ is the portion of net income the company has kept over a period of years.
Deficit
Negative balance in retained earnings caused by net losses over a period of years.
Assets, liabilities, and stockholders' equity
A company's balance sheet (also called the statement of financial position), reports three items:
Current and long-term
There are two main categories of assets:
Current assets
_____ _____ are assets that are expected to be converted to cash, sold, or consumed during the next 12 months or within the business's operating cycle if longer than a year.
Current
_____ assets include cash, short-term investments, Accounts and Notes receivable, Merchandise inventory, and Prepaid expenses.
Short-term
_____-_____ investments include stocks and bonds of other companies that a company intends to sell within the next year.
Accounts receivable
_____ _____ are amounts the company expects to collect from customers.
Notes receivable
_____ _____ are amounts a company expects to collect from a party who has signed a promissory note to that company and therefore owes it money.
Merchandise
_____ inventory is the company's most important, and probably the largest, current asset.
Prepaid expenses
_____ _____ represent amounts paid in advance for advertisements, rent, insurance, and supplies.
False. An asset always represents a future benefit.
True or False: An asset always represents a past benefit.
True
True or False: Cash, short-term investments, and current receivables are the most liquid assets, in that order.
Property, Plant, and Equipment (also called plant assets), and other assets.
The main categories of long-term assets are:
Property, Plant, and Equipment
PP&E stands for:
PP&E (Property, Plant, and Equipment)
Land, buildings, computers, store fixtures, and equipment are considered
Depreciation
_____ reallocates an asset's cost from the balance sheet to expense in the income statement over time as the asset is used in producing revenue.
Accumulated depreciation
_____ _____ is the total amount of depreciation recorded on PP&E from acquisition through the end of the most recent year.
Intangibles
_____ are assets with no physical form, such as patents, trademarks, and goodwill.
Long-term
_____-_____ investments are those investments the company does not intend to sell within the next year.
Other assets
_____ _____ is a catchall category for assets that are difficult to classify.
True
True or False: liabilities are divided into current and long-term categories.
Current liabilities
Debts payable within one year or within a company's operating cycle if longer than a year.
Year
Long-term liabilities are payable after one _____.
Income taxes payable
Tax debts owed to the government
Short-term notes payable
Amounts that a company has promised to pay back within one year or less.
Assets - liabilities = Owner's Equity
Stockholders' Equity equation
Operating, investing, and financing activities
Companies engage in three basic types of activities:
Operating activities
_____ _____ result in net income or net loss, and they either increase or decrease cash.
Economic, legal, and ethical.
Generally, three factors influence business and accounting decisions:
Economic
The _____ factor states that the decision being made should maximize the economic benefits to the decision maker.
Legal
The _____ factor is based on the proposition that free societies are governed by laws.
Ethical
The _____ factor recognizes that while certain actions might be both economically profitable and legal, they may still not be right.
Ethical analysis
An _____ _____ is needed to guide judgement for making decisions.
Historical cost
The valuation of assets on the balance sheet is generally based on:
An economic resource that's expected to benefit future operations.
The nature of an asset is best described as:
Both income statements and statements of cash flows
Which financial statement covers a period of time? Balance sheet, income statement, statement of cash flows or both income statements and statement of cash flows.
+$66,000
($120,000 - $50,000 - $4,000 = $66,000)
During the year, EcoWash, Inc., has $120,000 in revenues, $50,000 in expenses, and $4,000 in dividend payments. Stockholders' equity changed by:
Net income of $70,000
($120,000 - $50,000 = $70,000)
EcoWash has $120,000 in revenues, $50,000 in expenses, and $4,000 in dividend payments. What is the net income or net loss?
All of the above
Which item(s) are reported on the balance sheet? Inventory, accounts payable, retained earnings, or all of the above?
$175,000
(Determine the beginning liabilities
$340,000 = X + $130,000
X = $210,000 in beginning liabilities
($340,000 +$70,000) = ($210,000 + $25,000) + X
Solve for X
$410,000 = $235,000 + X
X = $175,000
Javis Company had total assets of $340,000 and total stockholders' equity of $130,000 at the beginning of the year. During the year assets increased by $70,000 and liabilities increased by $25,000. Stockholders' equity at the end of the year is: