Chapter 1 Section 2

International accounting

the study of accounting principles used by different countries

discussion memorandum

written to explain a topic being considered by the FASB

Which groups consistently expres opinions about proposed FASB statements?

(SEC) Security and Exchanges Committee (AICPA) the American Institute of Certified Public Accountants Public Accounting Firms (AAA) the American Accounting Association and businesses with direct interest in a particular statement

What are some of the rights, obligations, and limitations determined at the beginning of a partnership?

-the amount each partner will contribute to the business -each partner's percentage of ownership -each partner's share of the profits -the duties each partner will perform -the responsibility each partner has for the amounts owed by the business to creditors and tax authorities

Entity

An entity is recognized as having its own separate identity. An entity may be an individual, a town, a university, or a business.

How do you determine an owner's share of the corporation?

An owner's share of the corporation is determined by the number of shares of stock held by the owner compared to the total number of shares issued by the corporation. This also determines how many votes the owner get's in some corporate decisions.

How does a partnership begin?

At the beginning of the partnership, two or more individuals enter into a contract that details the rights, obligations, and limitations of each partner

Why is it important that the business transactions be kept separate from the owner's personal transactions?

If the owner's personal transactions are mixed with those of the business, it will be difficult to measure the performance of the business.

What is an LLP?

Limited Liability Partnership is a general partnership that provides some limited liability for all partners. LLP partners are responsible and have liability for their own actions and the actions of those under their control or supervision, but they are not liable for the actions or malfeasance of another partner.

Who is legally responsible for the debts and taxes of a sole proprietorship?

The owner of a sole proprietorship is legally responsible for the debts and taxes of the business. If the business is unable to pay its debts, the creditors can turn to the owner for payment. The owner may have to pay the debts of the business from personal resources, including personal savings. When the time comes to pay income taxes, the owner's income and the income of the business are combined to compute the total tax responsibility of the owner

Economic entity

Usually refers to a business or organization whose major purpose is to produce a profit for its owners

When does a Sole proprietor end?

When the owner is no longer willing or able to keep the business going?

Corporation

a business entity that is separate from its owners. A corporation has a legal right to own property and do business in its own name. Very different from sole proprietorships and partnerships Some corporate decisions require a vote by the owners.

Privately owned corporation

closely held corporations, the ownership is limited to specific individuals, usually family members. Stock of closely held corporations is not traded on an exchange.

Exposure draft

describes proposed statement after public hearings

Separate entity assumption

describes the concept of keeping the firm's financial records separate from the owner's personal financial records

S corporations

entities formed as corporations which meet the requirements of Subchapter S of the Internal Revenue Code to be treated essentially as a partnership so the corporation pays no income tax. Instead, shareholders include their share of corporate profits, and any items that require special tax treatment, on their individual income tax returns. Otherwise, S corporations have all the characteristics of regular corporations. The advantage of the S corporation is that the owners have limited liability and avoid double taxation

Social entities

nonprofit organizations, such as cities, public schools, and public hospitals.

creditors

people, companies, or government agencies to whom a business owes money

Stock

represents the ownership of the corporation in the form of stock certificates.

Statements of Financial Accounting Standards

statements developed by the FASB. Before issuing them, feedback is obtained from interested people and organizations.

Publicly owned corporation

stock is bought and sold on stock exchanges and in over the counter markets. Most large corporations have issued thousands of shares of stock.

What is an independent Certified Public Accountant?

Accountants who are not employees of the company being audited and do not have a financial interest in the company

5. What is the process for developing Generally Accepted Accounting Principles?

1.The FASB writes a discussion memorandum 2.Then public hearings are held where interested parties can express their opinions, either orally or in writing. 3.The FASB releases an exposure draft 4.The FASB receives and evaluates public comments about the exposure draft 5.FASB members vote on the statement. If at least four members approve, the statement is issued.

Sole proprietorship

A business entity owned by one person many small business are operated as sole proprietorships

Partnership

A business entity owned by two or more people. It is common in businesses that offer professional services, such as law firms, accounting firms, architectural firms, medical practices, and dental practices.

Auditor's report

Contains the auditor's opinion about the fair presentation of the operating results and financial positions of the business It also confirms that the financial information is prepared in conformity with generally accepted accounting principles.

Stockholders

Corporate owners, also called shareholders, are not personally responsible for the debts or taxes of the corporation. If the corporation is unable to pay its bills, the most stockholders can lose is their investment in the corporation. Stockholders will not lose more than the cost of the shares of stock.

How do companies comply with the GAAP?

Every year publicly traded companies submit financial statements to the SEC. The financial statements are audited by independent certified public accountants. The financial statements include the auditor's report. Financial statements and the auditor's report are made available to the public, including existing and potential stockholders.

What are some of the advantages of a corporation?

Indefinite life: other entities end with death or withdrawal, but a corporation does not end when ownership changes. Some corporations have new owners daily because their shares are actively traded.

What is IASC?

International Accounting Standards Committee formed in 1973. Recently, it was changed to the IASB, or International Accounting. They deal with issues caused by lack of uniform accounting principles, and they make recommendations to enhance comparability of reporting practices

4. Compare Entities: Responsibility for debts of the business

Sole Proprietorship- Owner is responsible for firm's debt when the firm is unable to pay Partnership- Partners are responsible individually and jointly for firm's debts when the firm is unable to pay Corporation- Stockholders are not responsible for firm's debts; they can lose only the amount they invested

What are the three types of business entities?

Sole proprietorship partnership corporation

4. Compare Entities: Life of the Business

Sole proprietorship- Ends when the owner dies, is unable to carry on operations, or decides to close the firm Partnership- Ends when one or more partners withdraw, when a partner dies, or when the partners decide to close the firm Corporation- Can continue indefinitely; ends only when the business goes bankrupt or when the stockholder vote to liquidate

4. Compare Entities: Ownership

Sole proprietorship- one owner Partnership- Two or more owners Corporation- One or more owners, even thousands

What is the AAA?

The American Accounting Association is a group of accounting educators. Its members research possible effects of a proposed FASB statement and offer thir opinions to the FASB

What is the AICPA?

The American Institute of Certified Public Accountants is a national association for certified public accountants

Who develops the Generally Accepted Accounting Principles?

The Financial Accounting Standards Board (FASB), which is composed of five full-time members.