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ABM224 Chapter 1
Intro to Financial Statements
| Term | Definition |
|---|---|
| Sole Proprietorship | A business owned by one person -simple to establish -owner controlled -tax advantages |
| Partnership | A business owned by two or more persons associated as partners -simple to establish -shared control -broader skills and resources -tax advantages |
| Corporation | A business organized as a separate legal entity owned by stockholders -easier to transfer ownership -easier to raise funds -no personal liability |
| Internal Users | Managers who plan, organize, and run a business -marketing managers -production supervisors -finance directors -company officers |
| External Users | -investors -creditors -taxing authorities -customers -labor unions -regulatory agencies |
| Investors | Use accounting information to buy, hold, or sell stock |
| Creditors | Such as suppliers and bankers use accounting info to evaluate the risks of selling on credit or lending money |
| Taxing Authorities | Such as the IRS, want to know if the company complies with the tax laws |
| Customers | Are interested in whether a company will continue to honor product warranties and otherwise support product lines |
| Labor Unions | Want to know whether the owners have the ability to pay increased wages and benefits |
| Regulatory agencies | Want to know whether the company is operating within prescribed rules |
| Sarbanes-Oxley Act (SOX) | Congress passed to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals |
| Liabilities | Amounts owed to creditors in the form of debt or other obligations |
| Note Payable | Money borrowed to pay for items like delivery trucks |
| Bonds Payable | Debt securities sold to investors that must be repaid at a particular date some years in the future |
| Common Stock | The total amount paid in by stockholders for the shares they purchase |
| Dividends | Cash payments to stockholders |
| Assets | Resources owned by a company -property, plant, and equipment (fixed assests) -cash |
| Investing activities | The purchase of the resources a company needs in order to operate -investments |
| Revenue | 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 -sales revenue -service revenue -interest revenue |
| Supplies | Assets used in day to day operations |
| Inventory | Goods available for future sales to customers are assets called... |
| Account recievable | The right to receive money in the future |
| Expenses | The cost of assets consumed or services used in the process of generating revenues -cost of goods sold -selling expenses -marketing expenses -administrative expenses -interest expense -income taxes |
| Accounts payable | Obligations to pay for goods on credit from suppliers -interest payable -wages payable -sales tax payable -property taxes payable -income taxes payable |
| Income statement | Report of revenues and expenses and a resulting net income or loss for a period of time |
| Retained earnings statement | Indicates 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 |
| Balance sheet | A picture at a point in time of what your business owns (assets) and what it owes (liabilities) |
| Statement of cash flows | Shows where your business obtained cash during a period of time and how that cash was used |
| Stockholders equity | Owners claim to assets |
| Basic accounting equation | Assets=Liabilities+Stockholder's Equity |
| Annual report | Includes: -financial statements -management discussion and analysis section -notes to the financial statement -independent auditors report |
| Management discussion and analysis section | presents managements views on the company's ability to pay near-term obligations, its ability to fund operations and expansion, and its results of operations |
| Unqualified opinion | Given if the auditor is satisfied that the financial statements provide a fair representation of the company's financial position and results of operations in accordance with generally accepted accounting principles |
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