Entrepreneurship Final Exam

Financial accounting

a formal, rule-based set of accounting principles and procedures intended for use by outside owners, investors, banks, and regulators

Financial accounting financial reports consist of

1) how profitable the business is 2) the value of the things that the business owns and who has a claim on that value 3) how much and from where money was received and how much and to whom money was paid

Balance sheet

a statement of what a business owns (assets), what a business owes to others (liabilities), and how much value the owners have invested in it (equity)

Entities that have an interest in the results of the business

bankers and other lenders who want to be assured that the business can repay loans, and governmental agencies that want to ensure that proper taxes are paid and specific regulations are followed

Pro forma financial statements

planning documents for future business activities that are formatted to look like the common financial statements of the income statement, balance sheet, and statement of cash flows

Different types of business taxes

- federal income tax - state income tax - employment taxes - inventory tax - excise taxes - sales tax - value-added tax

Three types of accounting you will need to use in a business

- financial accounting - managerial accounting - tax accounting

Three financial reports

- income statement - balance sheet - statement of cash flows (cash flow statement)

Each of these financial reports presents information about things that have already happened

- products and services were sold - various expenses were incurred

There are several compelling reasons to become familiar with the process and the uses of accounting for small businesses:

1) investors will not even consider funding your concept unless you provide specific accounting information in an accepted format 2) bankers will not loan money to a business that has no formal financial statements 3) you absolutely cannot know how your business is doing without accounting information 4) business planning and controlling cannot be done without accounting information

Standard budgeting

a method for business forecasting and control in which specific expected volumes and prices per unit are used

Statement of cash flows (cash flow statement)

a statement of the sources and uses of cash in a business for a specific period of time

Income statement

a statement that lists revenues and expenses and shows the amount of profit a business makes for a specified period of time

Financial accounting

based on a set of rules called GAAP that detail specific methods of keeping records of financial transactions; of placing the transactions into categories; and of producing specific financial reports

Many business owners are not active in the running of the business

do not know firsthand knowledge of the profits or losses

An essential part of business is

generating profits to increase the wealth of its owners

The final product of tax accounting

is a set of returns, forms, and schedules

Tax accounting

is done by following the tax laws and regulations that are made by various governments

The primary value of tax accounting

is for a business to avoid penalties for noncompliance and to legally minimize how much money it has to pay in taxes

The final product and the managerial accounting process

is not just a spending plan as you might make for your family; rather it is a detailed plan for future operations and is the standard against which actual results are compared to assess the performance of individual managers, operations, departments, and divisions

Managerial accounting

is used for planning future business operations - forward looking

Profit planning

the process of creating a set of interconnected budgets that combine into a master budget that can be used for assessing and controlling the business processes

Generally accepted accounting principles (GAAP)

the standardized rules for accounting procedures set out by the Financial Accounting Standards Board and used in all audits and submissions of accounting reports to the government