Intro to Financial Accounting Chapter 1 (Introduction to Financial Statements)

Investors

(owners) use accounting information to make decisions to buy, hold, or sell stock

Questions asked by internal users relate to . . .

1. Finance 2. Marketing 3. Human Resources 4. Management

Sole Proprietorship

A business owned by one person

Sarbanes-Oxley Act

A law passed by Congress that requires the CEO and CFO to certify that their firm's financial statements are accurate; made work more ethical

Certified Public Accountant (CPA)

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

Balance Sheet Equation

Assets = Liabilities + Owner's Equity

Retained Earnings Equation

Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings

Operating Activities

Cash flow activities that include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income.

True or false: income statements, retained earnings statements, and balance sheets all have "for month ended . . ."

False; balance sheet has specific date

Investing Activities

Includes cash transactions involving the purchase and sale of long-term assets and current investments

Four types of financial statements

Income statement, retained earnings statement, statement of cash flows, balance sheet

Types of accounting users

Internal and external

Financing activities deal with . . .

Liabilities (notes payable, bonds payable, etc.), common stock, dividends

Creditors

People who lend money

External Users

Persons using accounting information who are not directly involved in running the organization

Auditor's report

Prepared by an independent outside auditor, gives their opinion

Income Statement Equation

Revenues - Expenses = Net Income

Factors to consider in deciding which organizational form to choose include . . .

Taxes and legal liability

common stock

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

Accounting definition

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

True or false: investors are interested in a company's net income because it provides useful information for predicting future net income

True

Corporation

a business organized as a separate legal entity owned by stockholders

Partnership

a business owned by two or more people

Which of the following is an example of a financing activity? a) issuing shares of common stock b) selling goods on account c) buying delivery equipment d) buying inventory

a) issuing shares of common stock

The element of a corporation's annual report that describes the corporation's accounting methods is/are the: a) notes to the financial statements b) management discussion and analysis c) auditor's report d) income statement

a) notes to the financial statements

What section of a statement of cash flows indicates the cash spent on new equipment during the past accounting period? a) the investing activities section b) the operating activities section c) the financing activities section d) the statement of cash flows does not give this information

a) the investing activities section

Investing activities deal with . . .

assets (cash, PPE, etc.)

The element of the annual report that presents an opinion regarding the fairness of the presentation of the financial position and results of operations is/are the: a) income statement b) auditor's opinion c) balance sheet d) comparative statements

b) auditor's opinion

Which statement presents information as of a specific point in time? a) income statement b) balance sheet c) statement of cash flows d) retained earnings statement

b) balance sheet

Which of the following not one of the three forms of business activity? a) sole proprietorship b) creditorship c) partnership d) corporation

b) creditorship

Which is not one of the three primary business activities? a) financing b) operating c) advertising d) investing

c) advertising

Which financial statement reports assets, liabilities, and stockholder's equity? a) income statement b) retained earning's statement c) balance sheet d) statement of cash flows

c) balance sheet

Which is an advantage of corporations relative to partnerships and sole proprietorship? a) lower taxes b) harder to transfer ownership c) reduced legal liability for investors d) most common form of organization

c) reduced legal liabilities for investors

Notes to the financial statements

clarify the financial statements and provide additional detail

As of Dec. 31, 2017, Rockford Corporation has assets of $3,500 and a stockholder's equity of $1,500. What are the liabilities for the company as of Dec. 31, 2017? a) $1,500 b) $1,000 c) $2,500 d) $2,000

d) $2,000

The financial statements for Macias Corporation contained the following information: Accounts receivable - $5,000 Sales Revenue - $75,000 Cash - $15,000 Salaries and Wages Expense - $20,000 Rent Expense - $10,000 What was Macias Corporation's net income? a) $60,000 b) $15,000 c) $65,000 d) $45,000

d) $45,000

Which statement about users of accounting information is incorrect? a) management is considered an internal user b) taxing authorities are considered external users c) present creditors are considered external users d) regulatory authorities are considered internal users

d) regulatory authorities are considered internal users

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.

d) revenues exceed expenses

Which of the following did not result from the Sarbanes-Oxley Act? a) top management must now certify the accuracy of financial information b) penalties for fradulent activity increased c) independence of auditors increased d) tax rates on corporation increased

d) tax rates on corporation increased

Corporation Advantages

easier to transfer ownership, easier to raise funds, no personal liability

net loss

expenses are greater than revenues

Three types of business activities are . . .

financing, investing, and operating

Financing Activities definition

includes cash transactions resulting from the external financing of a business

Types of external users

investors, creditors, taxing authorities, customers, labor unions, regulatory agencies

Accounting Information System

keeps track of the results of each of the various business activities- financing, investing, and operating

Internal users definition

managers who plan, organize, and run a business

Internal users examples

marketing managers, production supervisors, finance directors, and company officers

Management discussion and analysis (MD&A)

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

Statement of Cash Flows

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

Income Statement

reports a company's revenues and expenses and resulting net income or loss for a specific period of time; helps users determine if the company's operations are profitable

Operating activities deal with . . .

revenue (sales revenue, service revenue, interest revenue, etc.) and expenses

Net Income

revenues are greater than expenses

Sole Proprietorship Advantages

simple to establish, owner controlled, tax advantages

Partnership Advantages

simple to establish, shared control, tax advantages, broader skills and resources