Test 1 Study Guide (Chapters 1 and 2)
Test 1 Study Guide (Chapters 1 and 2) ACCT 2110 - 002
Popular in Principles of Financial Accounting
ACCT 2110 - 002
verified elite notetaker
Popular in Accounting
This 3 page Study Guide was uploaded by Callisa Ruschmeyer on Wednesday January 27, 2016. The Study Guide belongs to ACCT 2110 - 002 at Auburn University taught by Elizabeth G Miller in Fall 2015. Since its upload, it has received 91 views. For similar materials see Principles of Financial Accounting in Accounting at Auburn University.
Reviews for Test 1 Study Guide (Chapters 1 and 2)
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 01/27/16
Test 1 Study Guide Forms of Business Organization Sole Proprietorship o Advantages: easily to form; control all operations; pay less taxes than corporations o Disadvantages: personally liable for any debt; life of business is only equal to the life of the owner Partnership o Advantages: increased financial resources; more skills between two people; pay less taxes than corporations o Disadvantages: control of operations is shared; two owners liable for any debt; life of business is only equal to the life of the partners Corporation o Advantages: raise large amounts of money; transferrable ownership (by stock); owners' only liable for the amount they invest in the business o Disadvantages: formation of business is complex; high taxes Financial Statement Time Periods Balance sheet at beginning of period Period-of-time Statements o Income statement o Retained earnings statement o Statement of cash flows Balance sheet at end of period See other notes for details on the 4 Types of Financial Statements Who uses this information? The government, investors, owners, and creditors Balance sheet- assets, liabilities, and stockholders' equity (at a specific point in time) Income statement- revenues, expenses, and net income/loss (over a period of time) Retained earnings statement- retained earnings at the start, net income, and dividends (over a period of time) Statement of cash flows- operating, investing, and financing activities (over a period of time) Some Useful Formulas Stockholder's equity = common stock + retained earnings Change in stockholders' equity = change in common stock = change in retained earnings Change in retained earnings = net income - dividends Change in stockholders' equity = change in common stock + net income - dividends Simple Accounting Vocabulary and Concepts Revenue- assets from the sale of goods or services (increase) Expense- assets consumed in the operation of a business (the costs) Net income (loss)- revenues minus expenses Dividend- distribution of earnings to stockholders Asset- the resources of a company Liability- resources of a company that are claimed by creditors Stockholders' equity- owner's (stockholder's) claim on resources Receivable- the right to collect from customers; an asset GAAP- generally accepted accounting principles- rules and conventions of accounting SEC- Securities and Exchange Commission- holds the power to set rules of accounting for publicly traded companies Operating Cycle- company purchasing goods --> reselling the goods --> collecting the cash from the goods Liquidity- the ability for a company to pay short-term debts on time (measured by working capital and the current ratio) Net Profit Margin Net Income/Net Sales produces a percentage Compare percentage to recent years or other markets of competitors to see how well the company is going Business Activities (Cash Flow) Operating- any inflow or outflow directly relating to operations; what money is directly used in a business in order to earn a profit o Inflow- cash collections from customers, account receivables, cash sale (not sales on account), insurance settlement money o Outflow- payments on supplies, salaries, utilities, rent, advertising, accounts payable, inventory Investing- relating to the acquisition or sale of investments (assets or equipment) that will later be used to generate revenues o Inflow- sale of long-term assets o Outflow- purchases of long-term assets Financing- relating to getting capital of the company or getting the funds to start a business o Inflow- selling stock, borrowing money (loans) o Outflows- repaying loans, pay dividends to stockholders Items in the Annual Report and Professional Ethics All four financial statements make up annual reports Notes to the financial statements (footnotes)- clarify information in statements o The info can be numerical or qualitative Management's discussion and analysis- management's explanation to expand on favorable and unfavorable trends o Also expand on any risks that the company may be facing (or soon to face) Audit report- here is where the auditor's opinion is given o Best opinion- "unqualified" (basically everything looks good) o Okay opinion- "everything looks good except for _______" o Worst opinion- no opinion is given Essentially this tells investors that the company has many issues and should steer clear of it Professional Ethics Validity of financial statements comes from professional ethics Ethics ensures that managers can trust their employees; investing public must trust accountants and ensure all formal codes are followed Remember, all of the Financial Accounting PowerPoints can be found on Canvas I also highly recommend looking at pages 26 and 29-31 in the textbook for quick reviews and summaries of the key points in this chapter!
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'