ACCTG 201: Exam 1

What are the disadvantages of a partnership?

-hard to sell stocks -personally liable for all debts and legal obligations

What are the disadvantages of a sole proprietorship?

-hard to sell stocks -personally liable for all debts and legal obligations

What are the disadvantages of a corporation?

-less favorable tax treatment (higher taxes)

What are the advantages of a partnership?

-more economic resources available -partners bring unique skills or resources -favorable tax treatment (lower taxes)

What are the advantages of a corporation?

-shares of stock are easy to sell -individuals can become stockholders -easier to raise funds -not personally liable for all debts and legal obligations

What are the advantages of a sole proprietorship?

-simple to set up -gives you control -favorable tax treatment (lower taxes)

What order are the financial statements prepared in?

1. Income Statement 2. Statement of Retained Earnings 3. Balance Sheet 4. Statement of Cash Flows

What is a corporation?

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

What is a sole proprietorship?

A business owned by one person.

What is a partnership?

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

What is materiality?

A company-specific aspect of relevance. An item is this when its size makes it likely to influence the decision of an investor or creditor.

What are external users?

A person outside of an organization who does not directly run its operations and uses financial or accounting information about that company to make decisions.

What are the three main forms of business ownership?

A sole proprietorship, a partnership, and a corporation.

What is a liability? Examples?

Amounts owed to creditors--in the form of debt and other obligations. Examples: -note payable -bonds payable -accounts payable -interest payable -wages payable -sales taxes payable -property taxes payable -income taxes payable

What are current assets? Examples?

Assets that a company expects to convert to cash or use up within one year or its operating cycle, whichever is longer. Examples (in this order): -cash -investments -receivables (accounts receivables, notes receivable, and interest receivable) -inventories -supplies -prepaid expenses

What are intangible assets? Examples?

Assets that do not have physical substance and yet often are very valuable. Examples: -goodwill -patents -copyrights -trademarks or trade names

What is property, plant, and equipment? Examples?

Assets with relatively long useful lives that are currently used in operating the business. Examples: -land -buildings -equipment -delivery vehicles -furniture

What is the basic accounting equation?

Assets= Liabilities + Stockholders' Equity

What are financing activities and what are some examples of them?

Borrowing money and issuing shares of stock in exchange for cash. Examples: -Note payable -Bonds payable -Common Stock -Paying dividends -Liabilities

What are long-term investments? Examples?

Investments in stocks and bonds of other corporations that are held for more than one year, long-term assets such as land or buildings that a company is not currently using in its operating activities, and long-term notes receivables.

How do external users use accounting information in decision-making?

Investors (owners) use accounting information to make decisions to buy, hold, or sell stock. Creditors such as suppliers and bankers use accounting information to evaluate the risks of selling on credit or lending money. Taxing authorities (is the company complying with tax laws?), customers (will the company honor warranties?), labor unions (can the owners pay increased wages and benefits?), and regulatory agencies (is the company operating within the prescribed rules?)

What are some examples of external users?

Investors (owners), creditors, taxing authorities, customers, labor unions, and regulatory agencies.

What are investing activities and what are some examples of them?

Involves the purchase of the resources a company needs to operate. Examples: -purchase of assets -cash -investments

What are the three types of business activities?

Operating, investing, and financing.

What are operating activities and what are some examples of them?

Pertains to a company's core business activities (provides a majority of a company's cash flow). Examples: -revenues -supplies -inventory -account receivable -expenses (including cost of goods sold) -accounts payable

What is management discussion and analysis?

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.

What type of ratio is earnings per share (EPS) and what does it measure? What is the equation for earnings per share?

Profitability ratio. Measures the net income earned on each share of common stock. Earnings per share= (Net Income - Preferred Dividends)/(Average Common Shares Outstanding)

What is the purpose of the income statement and what period does it represent?

Reports a company's revenues and expenses and resulting net income or loss for a SPECIFIC period of time.

What is the Full Disclosure Principle?

Requires that companies disclose all circumstances and events that would make a difference to financial statement users.

What is the Monetary Unit Assumption?

Requires that only those things that can be expressed in money are included in the accounting records.

What is an asset? Examples?

Resources owned by a business. Examples: -property -plant -equipment -cash -investments -supplies -inventory -account receivable

What is comparability?

Results when different companies use the same accounting principles.

What is Net Income made up of?

Revenues - Expenses

What is the Economic Entity Assumption?

States that every economic entity can be separately identified and accounted for. (Not mixing personal accounts with company accounts)

What is the Going Concern Assumption?

States that the business will remain in operation for the foreseeable future.

What is the Periodicity Assumption?

States that the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared for the business.

What is the auditor's report and who prepares it?

States 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. Prepared by an independent outside auditor (aka CPA; certified public accountant).

Who sets the standards?

The FASB

Who oversees the standard-setting bodies?

The SEC

What is understandability?

The accounting information is presented in a clear and concise fashion, so that reasonably informed users of that information can interpret it and comprehend its meaning.

What is being timely?

The accounting information must be available to decision-makers before it loses its capacity to influence decisions.

What is depreciation?

The allocation of the cost of an asset to a number of years.

What are expenses? Examples?

The cost of assets consumed or services used in the process of generating revenues. Examples: -cost of goods sold -selling expenses -marketing expenses -administrative expenses -interest expense -income taxes

What are revenues? Examples?

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. Examples: -sales revenue -service revenue -interest revenue

What is stockholders' equity? Examples?

The owners' claim to assets. Examples: -common stock -retained earnings

How do internal users use accounting information in decision-making?

They need detailed information on a timely basis. Internal reports, projections of income from new sales campaigns, and forecasts of cash needs for the next year. They are given financial statements.

What is the purpose of an annual report?

To help analyze a company's financial situation and performance.

What is the purpose of the retained earnings statement and what time period is represented?

To indicate how much of previous income was distributed to you and the other owners of your business in the form of dividends, and how much was retained in the business to allow for future growth.

What is the purpose of the balance sheet and what time period is covered?

To present a picture at a point in time of what your business owns (its assets) and what it owes (its liabilities).

What is the purpose of the statement of cash flows and what period is covered?

To show where your business obtained cash during a specific period of time and how that cash was used.

How is working capital calculated and what does it measure? What type of ratio?

Working Capital= Current Assets - Current Liabilities Measure the likelihood that the company will or will not be able to pay its liabilities. Liquidity Ratio.

What are dividends? Examples?

Cash payments to stockholders. -Dividends paid -Retained dividends

What are notes to the financial statements?

Clarify the financial statements, and provide additional detail.

What is Stockholders' Equity made up of?

Common Stock + Retained Earnings

What makes up stockholders' equity?

Common stock and retained earnings.

What order are current assets listed on the balance sheet?

Companies list current assets in the order in which they expect to convert them into cash. -cash -investments -receivables -inventories -supplies -prepaid expenses

How is the current ratio calculated and what does it measure?

Current Ratio= Current Assets/Current Liabilities Current ratio measures liquidity.

What is free cash flow?

Describes the net cash provided by operating activities after adjusting for capital expenditures and dividends paid. Free Cash Flow= Net Cash Provided by Operating Activities - Capital Expenditures - Cash Dividends

What is the historical cost principle?

Dictates that companies record assets at their cost. (purchased at 10,000 always recorded at 10,000)

What does GAAP stand for? Who oversees GAAP and who sets the standards?

Generally accepted accounting principles. Accounting professionals at all U.S. companies get guidance from a set of accounting standards that have authoritative support. Standard-setting bodies, in consultation with the accounting profession and the business community, determine these accounting standards.

What is a classified balance sheet?

Groups together similar assets and similar liabilities, using a number of standard classifications and sections.

Debt to Assets Ratio= Total Liabilities/Total Assets Debt to assets ratio is one measure of solvency.

How is the debt to assets ratio calculated and what does it measure?

What is relevance?

If accounting information would make a difference in a business decision. Information is considered this if it has predictive value (helps provide accurate expectations about the future) or confirmatory value (confirms or corrects prior expectations).

What is the fair value principle?

Indicates that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability). Used for assets that are actively traded. Recording at the market value.

What are internal users?

Managers who plan, organize, and run a business.

What are some examples of internal users?

Marketing managers, production supervisors, finance directors, and company officers.

What is consistency?

Means that a company uses the same accounting principles and methods from year to year.

What is Faithful Representation? What must it be?

Means that information accurately depicts what really happened. To provide this, information must be complete (nothing important has been omitted), neutral (is not biased toward one position or another), and free from error.

What are solvency ratios?

Measure the ability of the company to survive over a long period of time.

What are profitability ratios?

Measure the operating success of a company for a given period of time.

What are liquidity ratios?

Measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.

What are Retained Earnings made up of?

Net Income - Dividends

What are long-term liabilities? Examples?

Obligations that a company expects to pay after one year. Examples: -bonds payable -mortgages payable -long-term notes payable -lease liabilities -pension liabilities

What are current liabilities? Examples?

Obligations that the company is to pay within the next year or operating cycle, whichever is longer. Examples: -accounts payable -salaries and wages payable -notes payable -interest payable -income taxes payable

What is Cost Constraint?

Weighs the cost that companies will incur to provide the information against the benefit that financial statement users will gain from having the information available.

-Comparability -Consistency -Verifiability -Timeliness -Understandability

What are the enhancing qualities of useful information?

-Monetary Unit Assumption -Economic Entity Assumption -Periodicity Assumption -Going Concern Assumption

What are the four assumptions?

Relevance and Faithful Representation

What are the fundamental qualities of useful information?

-Current liabilities -Long-term liabilities -Stockholders' equity

What is on the Liabilities and Stockholders' equity portion of the classified balance sheet and in what order?

-Current Assets -Long-term Investments -Plant, Property, and Equipment -Intangible Assets

What is on the assets portion of the classified balance sheet and in what order?

Management discussion and analysis, notes to the financial statements, and auditor's report.

What items are included in an annual report?

What is verifiability?

When independent observers, using the same methods, obtain similar results.