Chapter 1: Business Decisions & Financial Accounting
SI Acct 284- September 3, 2008
1. What is accounting?
System that collects and processes financial information about an organization and reports that information to decision makers.
2. Who are the decision makers that use the financial information?
Internal: Mananagement—Acct 285; Basically looking at internal costs to produce products, support services, etc.
External: 1. Investorsà want to know about the profitability; buying into future profits; in it to make money.....Creditorsà examples: banks, suppliers, etc.; want to know if the company has the ability to pay them!!...... Governmentà watchdog; want to protect public from fraud and unethical business practices
3. List the FOUR financial statements:
Balance Sheet: statement of financial position at a point in time...ex: December 31, 2008àOnly tells us what assets, liabilities, and SHE we have on THAT day….for example…we might have $100,000 on Dec. 31st, but two days later we might spend half of that on new equipment
Income statement: shows net income (aka net profit, bottom line); Revenues less Expenses; covers business over a period of time (typically 1 year)
Statement of Retained Earnings (RE): transition statement; shows the effect of NI and declaration of dividends on RE
Statement of cashflows: reports inflows and outflows of cash; cash is pretty much the most valuable asset- most liquid; does NOT necessarily reflect revenues and expenses; for example, a company may sell $100,000 (revenues) of goods, but only receive cash of $50,000. The rest might be on credit…therefore, the company only has $50,000 in cash.
4. Who is primarily responsible for the information in a company’s financial statements?
TOP MANAGEMENT; CEO; Sarbanes-Oxley Act of 2002 requires them to sign off and accept responsibility for the accurateness of the financial statements.
5. What are the three activities on the statement of cash flows?
Operating: cash sales, paying bills via cash, receiving cash payments
Financing: taking out a loan, issuing stock, anything to get cash
Investing: buying equipment with cash, buying investments with cash, etc.
6. What is the disadvantage of incorporation? Explain.
Double Taxation: the company gets taxed on the profit at the corporate level (typically 35%), then if company declares dividends, shareholders get taxed on dividends they receive at the individual level because it’s “income” (typically 15% unless you’re in the lowest income tax bracket)
7. What are the three key accounting equations?
Assets= Liabilities + Stockholders’ Equity
-essentially liabilities and SHE are how you finance assets
-KNOW THIS!! The very basis of all accounting!!
End RE= Beg RE + NI- Dividends
NI= Revenues- Expenses (+ Gains – Losses)
-Revenues= income from doing business—why the company exists (Wal-Mart’s operation involves selling merchandise)
-Expenses= necessary expenditures to operate and generate income; paying utilities, paying employees, etc
-Gains= income from activities that is not a normal part of business (selling delivery truck or equipment)
-Losses= outflows of money due to activities not part of business (loss from fires, loss on investments in other companies, etc)
8. Match the following words with the word that best fits each description.
a. Relevance b. Reliability
c. Comparability d. Consistency
e. Sole proprietorship f. Partnership
g. Corporation h. assets
i. liabilities j. stockholder’s equity
k. revenues l. expenses
___h.__ The resources owned by a company.
Examples: Plant, Property, Equipment, Cash, Investments, Prepaid expenses
__d__ Financial information of a single company that can be compared over time
because similar accounting methods have been applied.
You are able to look at NI in several years and accurately compare because they were derived through the same acct methods
__e.___ A business with one owner; unlimited liability.
__j__ The total amounts invested and reinvested in the business by the owners.
Contributed capital= initial investment (paid for stock, owners give to start up a company) and Retained earnings= money that was earned (profit) that is kept by the company, not paid in dividends.
___l_ The costs of business necessary to earn revenue.
Ex: utilities, wages, etc.
__a___ A feature of financial information that allows it to influence a decision.
__f__ A business in which two or more people take ownership; unlimited liability.
___k_ Earned by selling goods or services to customers (purpose of business)
___i._ The amounts owed by the owners/company.
___b_ Financial information that is unbiased and verifiable. Reliable. Information is accurate
__g__ A business with limited liability; protects personal assets of owners.
Owners/ stockholders are only responsible for what they invest (i.e. can only lose the money they paid for the stock or the money they gave )
__c__ Financial information that can be compared across businesses because similar
accounting methods have been applied.