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
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
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)
We also discuss several other topics like What is the molecular structure of water?
∙ 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 If you want to learn more check out What is descriptive research?
∙ 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 We also discuss several other topics like What are military weaknesses?
∙ Compare percentage to recent years or other markets of competitors to see how well the company is going
Business Activities (Cash Flow) We also discuss several other topics like Why did the habsburgs fail?
∙ 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 We also discuss several other topics like What is the meaning of hominins?
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 We also discuss several other topics like Where can you get omega 3 fatty acids?
∙ 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!