Chapter 1 Intro to financial statements

Notes to financial statements

"Information about interest rates that the company is being charged on outstanding debts and their due dates" would be included in what part of the annual report

Other elements of annual report

- Clarify the financial statements. - Provide additional qualitative and/or quantitative detail

Solving ethical dilemma

1. Recognize an ethical situation and the ethical issues involved 2. Identify and analyze the principal elements in the situation 3. Identify the alternatives, and weigh the impact of each alternative on various stakeholders

Corporation

A business organized as a seperate legal entity owned by stockholders. Ownership evidenced by shares of stock - Easier to transfer ownership -Easier to raise funds - No personal liability ADVANTAGES: - Can attract large amounts of capital investment - Allows for easy transfer of ownership (through stocks) - Can attract professional management - Provides stockholders with limited liability DISADVANTAGES: - Subject to more gov. regulations - Difficulty knowing whether management is making decisions in shareholders' best interests - Subject to income tax

Bond

A certificate that represents a corporation's promise to repay a certain amount of money and interest in the future

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. US companies that are publicly traded must provide shareholders with an annual report. These are more comprehensive than a financial statement, Always includes: 1. Financial statements 2. Management discussion and analysis 3. Notes to financial statements 4. Auditors report

Financing

All of the following are examples of which business activity? - Taking out a loan at a bank - Borrowing directly from investors - Selling shares of stock to investors

Revenues

Amounts earned from the sale of products

Auditor

An accountant, who conducts independent examinations of a companies financial statements in order to express an opinion regarding the fairness or accuracy of a companies financial statements and the companies conformance with the generally accepted accounting principals. (GAAP)

Sarbanes Oxeley Act

An act of congress in 2002 intended to bring reform to corporate accountability and stewardship in the wake of a number of major corporate scandals. Resulted in: 1. Top management must now certify the accuracy of financial info 2. Penalties for fraudulent activity was increased 3. Independence of auditors was increased 4. Increased oversight by the board of directors must occur, including the board's selection and supervision of the independent auditor

CPA

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

Auditors opinion

As to the fairness of the presentation of the financial position and results of operations and their conformance with GAAP

True

Balance sheet is prepared as of a specific date while Income statements, retained earnings statement, and a statement of cash flows are all for a period of time such as a month.

Retained earnings statement

Beginning equity + Owner contributions + Net income - dividends = ending equity (retained earnings) *NET INCOME MUST BE PRODUCED 1st*

Partnership

Business owned by 2 or more individuals; organization form used by accounting firms and law firms. - Simple to establish - Shared control - Broader skills and resources - Tax advantages

Communicating with users

Business prepare 4 financial statements from the summarized accounting data: 1. Income statement 2. Retained earnings statement 3. Balance sheet 4. Statement of cash flows ALMOST ALWAYS PREPARED IN THIS ORDER *Often, a company perpares a Statement of Stockholders' Equity rather than a Retained Earnings statement*

Statement of Cash Flows

Cash inflows - Cash outflows = net cash flow

Share of stock

Certificate that acts as evidence of ownership in a corporation

1. Expense 2. Asset 3. Liability 4. Common stock 5. Revenue 6. Liability

Classify each item as an asset, liability, common stock, revenue, or expense 1. Cost of renting property 2. Truck purchased 3. Notes payable 4. Issuance of ownership shares 5. Amount earned from providing service 6. Amounts owed to suppliers

C (Net income exceeded zero so its revenue must have exceeded its expenses)

Consider the following situation: The retained earnings statement of Grant Corporation shows dividends of $68,000, while net income for the year was $75,000. Which statement must be true? A. None of these B. All of these C. Grant's revenues must have exceeded its expenses D. Grant's revenues must have exceeded its dividends E. Grant's expenses must have exceeded its revenues

1. Corporation 2. Sole proprietorship and partnership 3. Corporation 4. Sole proprietorship and partnership 5. Corporations

Corporation, sole proprietorship, or partnership? 1. Easier to raise funds 2. Simple to establish 3. No personal legal liability 4. Tax advantages 5. Easier to transfer ownership

Expenses

Costs of assets consumed or services used in the process of generating revenues. Opposite of revenues (Cost of goods sold, selling, marketing, income taxes expense)

Management discussion and analysis (MD&A)

Covers the companies ability to pay near-term obligations, its ability to fund open operations and expansion, and its results of operations. Must highlights favorable or unfavorable trends and identify significant events and uncertainties that affect these three factors

Auditors report

Expresses an opinion as to whether the financial statements present fairly the company's results of operations and financial position

Inventory

Goods available for sale to customers

Equity

Includes investments from owners. Goes up if an additional owner comes in or additional investments from owners.

Unqualified opinion

Indicates that the financial statements are materially correct and fairly presented, no significant errors

Capital stock

Indicates the owners contributions to a corporation

External users

Investors and creditors. Investors (stockholders) use accounting information to help them decide whether to buy, hold or sell shares of a company's stock. Creditor's use accounting information to assess the risk of granting credit or loaning money to a business

Financing activities

Involve collecting the necessary funds to support the business. Transactions with creditors and owners. - Borrowing money is debt financing. Amounts owed are liabilities. Party to whom amounts are owed are creditors - Issuing (selling) shares of stock for cash. Payments to stockholders are called dividends

Operating activities

Involve putting the resources of the business into action to generate a profit. Once a business has the assets it needs, it can begin its operations by selling product. Items commonly affects by operation include: - Revenues - Inventory - Receivables

Investing activities

Involves the purchasing of resources a company needs in order to operate. Computers, delivery trucks, furniture, building, etc. Also includes investing

Accounting information system

Keeps track of the results of each of the 3 business activities

Internal users

Managers who need accounting information to plan, organize, and run business operations.

D

Net income will result during a time period when: A. assets exceed liabilities B. assets exceed revenues C. expenses exceed revenues D. revenues exceed expenses

Stockholder

One of the owners of a corporation... AKA a shareholder

Nonbusiness entity

Organization operated for some purpose other than to earn a profit; government entities/private orgs

Limited liability

Owner of corporation is shielded from liability of corporation. Partnerships and sole proprietorships are directly liable

Dividends

Payments from a business to stockholders/shareholders.

External users

People who are not employees of the business but use the businesses' financial info to make informed judgments. Owners (investors) and creditors

Purpose of accounting

Provide economic information as inputs for decision making by users of the information

Balance sheet

Reports assets, liabilities and equities as a particular point in time. *Assets = liabilities + Stockholders' equity (A=L+E)*

Income statement

Reports revenues and expenses for a specific period of time. Past net income provides information for predicting future net income. Net income = revenues - expenses

Liabilities

Represent amounts owed to another party (creditors) in the form of debts or other obligations (accounts payable, interest payable, wages payable, sales taxes payable, income taxes payable)

Assets

Resources owned by a business. Things such as computers, cash, delivery trucks, furniture, buildings etc. are all know as PPE (property, plant and equipment)

Equity

Retained earnings and common stock both fall under what?

Receivables

Right to receive money from another party (Accounts receivable are owed by customers; interest receivable is owed by debtors)

Sole Proprietorship

Single owner - Simple to establish - Owner controlled - Tax advantages

Creditor

Someone to whom a company or person has a debt AKA a lender

1. Notes to financial statement 2. Auditors report 3. Notes to financial statement 4. MD&A 5. MD&A 6. Auditors report

State whether each of the following items is most closely associated with the management discussion and analysis (MD&A), the notes to financial statements, or the auditors report 1. Descriptions of significant account policies 2. Unqualified opinion 3. Explanations of uncertainties and contingencies 4. Description of ability to fund operations and expansion 5. Description of results of operation 6. Certified public accountant (CPA)

Retained earnings

The amount of net income retained in the corporation

Adverse opinion

The auditor believes the financial statements are so materially misstated or misleading that they do not represent the company or comply with GAAP.

Qualified opinion

The auditor has a limitation of scope within the audit or there is a violation of GAAP

Disclaimer

The auditor is unable to satisfy himself or herself that the financial statements are fairly stated will use the ___________ of opinion

Net loss

The excess of expenses over revenues

Net income

The excess revenues over expenses. Example: $1000 in revenue, $600 in expenses, $100 to employees = $300 net income

Accounting

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

Ethics in financial reporting

US regulators and lawmakers were very concerned that the economy would suffer if investors lost confidence in corporate accounting because of unethical financial reporting.

Generally accepted accounting principals. (GAAP)

Various methods, rules, practices, and other procedures that have evolved over time in response to the need to regulate the preparation of financial statements

Financing Investing Operating

What are the 3 activities all business are involved in?

A

Which of the following financial statements is prepared as a specific date? A. Balance sheet B. Income statement C. Retained earning statement D. Statement of cash flows

Internal users

Work inside of a business. Businesses' employees such as management. Include marketing managers, production supervisors, finance directors and company officers