CH 1

Retained Earnings Statement

A financial statement that summarizes the amounts and causes of changes in retained earnings for a specific time period.

Auditors Report

A report prepared by an independent outside auditor stating the auditor's opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with generally accepted accounting principles.

Annual Report

A report prepared by corporate management that presents financial information including financial statements, a management discussion and analysis section, notes, and an independent auditor's report.

Management Decision & Analysis (MD&A)

A section of the annual report that presents management's views on the company's ability to pay near-term obligations, its ability to fund operations and expansion, and its results of operations.

Describe Primary Forms of Business Organization

A sole proprietorship is a business owned by one person. A partnership is a business owned by two or more people associated as partners. A corporation is a separate legal entity for which evidence of ownership is provided by shares of stock.

Identify the users and uses of accounting information.

Internal users are managers who need accounting information to plan, organize, and run business operations. The primary external users are investors and creditors. Investors (stockholders) use accounting information to help them decide whether to buy, hold, or sell shares of a company's stock. Creditors (suppliers and bankers) use accounting information to assess the risk of granting credit or loaning money to a business. Other groups who have an indirect interest in a business are taxing authorities, customers, labor unions, and regulatory agencies.

Corporation

A business organized as a separate legal entity owned by stockholders.

Sole Proprietorship

A business owned by one person.

Partnership

A business owned by two or more persons associated as partners.

Statement of Cash Flows

A financial statement that provides financial information about the cash receipts and cash payments of a business for a specific period of time.

Income Statement

A financial statement that reports a company's revenues and expenses and resulting net income or net loss for a specific period of time.

Balance Sheet

A financial statement that reports the assets and claims to those assets at a specific point in time.

Describe the content and purpose of each of the financial statements.

An income statement presents the revenues and expenses of a company for a specific period of time. A retained earnings statement summarizes the changes in retained earnings that have occurred for a specific period of time. A balance sheet reports the assets, liabilities, and stockholders' equity of a business at a specific date. A statement of cash flows summarizes information concerning the cash inflows (receipts) and outflows (payments) for a specific period of time.

Certified Public Accountant (CPA)

An individual who has met certain criteria and is thus allowed to perform audits of corporations.

Basic Accounting Equation

Assets = Liabilities + Stockholders Equity

Explain the meaning of assets, liabilities, and stockholders' equity, and state the basic accounting equation.

Assets are resources owned by a business. Liabilities are the debts and obligations of the business. Liabilities represent claims of creditors on the assets of the business. Stockholders' equity represents the claims of owners on the assets of the business. Stockholders' equity is subdivided into two parts: common stock and retained earnings. The basic accounting equation is Assets = Liabilities + Stockholders Equity

Explain the three principal types of business activity.

Financing activities involve collecting the necessary funds to support the business. Investing activities involve acquiring the resources necessary to run the business. Operating activities involve putting the resources of the business into action to generate a profit.

Notes to Financial Statements

Notes clarify information presented in the financial statements and provide additional detail.

Dividends

Payments of cash from a corporation to its stockholders.

Sarbanes-Oxley Act

Regulations passed by Congress to reduce unethical corporate behavior.

Assets

Resources owned by a business.

Common Stock

Term used to describe the total amount paid in by stockholders for the shares they purchase.

Net Loss

The amount by which expenses exceed revenues.

Net Income

The amount by which revenues exceed expenses.

Retained Earnings

The amount of net income retained in the corporation.

Expenses

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

Revenue

The increase in assets or decrease in liabilities resulting from the sale of goods or the performance of services in the normal course of business.

Accounting

The information system that identifies, records, and communicates the economic events of an organization to interested users.

Describe the components that supplement the financial statements in an annual report.

The management discussion and analysis provides management's interpretation of the company's results and financial position as well as a discussion of plans for the future. Notes to the financial statements provide additional explanation or detail to make the financial statements more informative. The auditor's report expresses an opinion as to whether the financial statements present fairly the company's results of operations and financial position.

Stockholders Equity

The owners' claim to assets.

Liabilities

Amounts owed to creditors in the form of debts and other obligations.