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61 Cards in this Set
- Front
- Back
forms of business organizations
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sole proprietorship: owned by one person
partnership: owned by more than one corporation: seprate legal entity owned by stockholders |
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advantages and disadvantages of partnership
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advantages: simple to establish, owner controlled, tax advantages
disadvantages: partners are personally liable, transfer of ownership difficult |
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advantages and disadvantages of partnerships
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advantages: simple to establish, owner controlled, tax advantages
disadvantages: owner is liable, financing is difficult, transfer of ownership difficult |
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advantages and disadvantages of a corporation
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advantages: easy to transfer ownership, greater capital raising potential, lower liability
disadvantages: unfavorable tax treatment |
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internal users
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managers who plan, organize run a business
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external users
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investors, creditors, others (tax authorities, regulatory agencies, customers, labor unions, economic planners)
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financial statements should reflect the results of these three types of activity...
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financing
investing operating |
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ways of outside financing a corporation
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borrowing money
issuing stock |
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liabilities
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debts and obligations of the business -- represent claims of creditors on the resources owned by the business
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common stock
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stock representing the primary ownership interest in a corporation
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investing activities
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obtaining resources needed to operate a business
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assets
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economic resources of a company that are expected to benefit the company's future operations
ex: cash, accounts, inventory, buildings, equipment, furniture |
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investings activities:
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purchase or sale of computers, delivery trucks, furniture, buildings
purchase or sale of investments |
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operating activities
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operating activities are the main activities for which the organization is in business
revetues and expenses |
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revenues
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the assets that result from sale of a product or service
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expenses
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the costs of assets consumed or services or services used to generate revenues
ex: cost of sales, store operating expenses, gen. and andmin. expenses, interest expenses |
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net income
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the excess of revenues over expenses
rev. - expenses = net income |
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income statement
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reports the results of operations for a specific period of time
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retained earnings statement
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reports the changes in retained earnings for a specific period of time
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balance sheet
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reports the assets, liabilities, and stockholders' equity at a specific date
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statement of cash flows
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reports the cash receipts and payments for a specific period of time
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ACCOUNTING EQUATION
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assets = liabilities + stockholder's equity
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ORDER OF FINANCIAL STATEMENTS PREPARED
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1. income statement
2. retained earnings statement 3. balance sheet 4. cash flow why? income statement gives you the net income, and then net income is factored into retained earnings, and then with that you use that to find stockholder's equity |
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annual report
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- letter to stockholders
- managements discussion and analysis - financial statements - notes to financial statements - reports of managemet's responsibilities - auditor's reports |
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letter to the stockholders
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tells the stockholders about the company's performance and prospects, followed by a "financial highlights" section that presents key stats. for a five yr. period
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management's discussion and analysis
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describes the company's financial condition and results of operations
explains the difference in results from one year to the next |
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notes to financial statements
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provides additional info. not included in the body of statements
does not have to be numeric |
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reports of management's repsonsibilities
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management acknowledges its responsibility for:
consistency, integrity, and presentation of the financial info. the effectiveness of internal control systems |
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auditor's report
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auditor's report:
auditor - independent CPA who conducts an independent exam.; auditor gives unqualified opinion on if the financial statements present the financial position, results of operations, and cash flows in accordance with GAAP auditor evaluates the effectiveness of the company's internal control system |
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classified balance sheet
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current assets
long-term investments property, plant, and equipment intangible assets current liabilities long-term liabilities stockholder's equity |
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current assets
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assets that are expected to be converted into cash within one year
current assets are listed in order of liquidity ex: cash, short-term investments, supplies, prepaid expenses, etc. |
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long term investments
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investments of stocks an bonds of other corporations which are normally held for many years
investments in long term assets such as land and buildings that are not currently being used in the company's operations |
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property, plant, and equiptment
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assets with relatively long, useful lives
assets used in operating the business ex: land, buildings, machinery, delivery and equipment, furniture and fixtures |
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depreciation
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practice of allocating an asset's full purchase price to a number of years instead of expensing a full cost in year of purchase
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accumulated depreciation
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shows the total amount of depreciation taken over the whole life of the asset
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assets that a company depreciates...
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should be shown at cost less accumulated deprecation
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intangible assets
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non-current assets - more than 1 yrs. , have no physical substance,
ex: patents, copyrights, trademarks, trade names, franchise |
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current liabilities
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obligations that are supposed to be paid within the coming year...
accounts payable, wages payable, bank loans available, interest payable, taxes payable, current maturities of long-term bank loans payable |
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long-term liabilities
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debts expected to paid after one year;
ex: bonds payable, mortgages payable, long term notes, lease liabilities, obligations under employee pension plans |
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stockholder's equity
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capital stock: investments of assets in the business by stockholders
retained earnings: earnings kept for use in the business |
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statement of stockholder's equity
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two parts:
common stock and retained earnings the statement of stockholder's equity reports all changes in the common stock and retained earninfs accounts |
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statements of cash flows
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provides info. about sources and uses of cash, organized
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statements of cash flows
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provides info. about sources and uses of cash, organized as
operating activities investing activities financing activities |
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ratio analysis
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expresses relationship among selected items of financial data
relationships: percentage rate proportion |
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profitibility ratio
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measures the income or operating success of a company for a given period of time
earnings per share |
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liquidity ratio
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net income / average # shares
measures short-term ability of company to pay its maturing obligations and meet unexpected needs for cash |
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solvency ratio
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measures the ability of the company to survive over a long period of time
total debt/ total assets free cash flow = cash provided by operations - capital expenditures - cash dividends measures percentage of assets financed by creditors rather than stockholders |
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multiple measures for ratio analysis
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intracompany ratios: covering 2 yrs. of the same company
industry -ave. comparisons: based on the ave. ratio for a particular industry intercompany comparisons: based on comparisons with a competitor in the same industry |
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earnings per share
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eps = net income - preferred stocks dividends / ave. common shares outstanding
higher value = improved performance |
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working capital
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measure of short-term ability to pay for obligations
difference between current assets and current liabilities working capital = current assets - current liabilities |
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current ratio
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current ratio = current assets / current liabilities
more dependable indicator does not consider current compposition |
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remaining liquid and solvent is as important as making a profit because...
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a company can survive a long time without profits... but it cant survive very long without cash
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primary accounting setting body in the US
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financial accounting standards board
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US govt. agency that oversees financial markets
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securities exchange commission
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GAAP
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rules of accounting
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FASB
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makes the rules
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SEC
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enforces the rules
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relevance
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info. makes a difference in decisions, provides basis for forecasts, confirms corrects prior ideas, timely
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reliability
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information must be free of error and bias; verifiable, faithful representation; neutral
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compariblity
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ability to compare information of different companies b/c they use the same accounting principles; different companies use similar accounting principles
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consistancy
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use of the same accounting principles and methods from year to year within the same company; company uses the same accounting methods from year to year
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