Chapter 1: Introduction to Financial Statements Study Guide (Vocabulary Flashcards)

Vocabulary flashcards covering forms of business organization, types of business activity, and the four financial statements with key terms and concepts from Chapter 1.

Sole Proprietorship

A form of business organization that is simple to establish, owned and controlled by one person, with tax advantages.

Partnership

A simple-to-establish business form with shared control, broader skills/resources, and tax advantages.

Corporation

A business form that facilitates easy ownership transfer, easier access to funds, and limited personal liability.

LLC (Limited Liability Company)

A hybrid form that combines limited liability with partnership-style tax treatment.

S Corporation

A hybrid form with limited liability and pass-through taxation.

Accounting information system

The system that identifies, records, and communicates the economic events of an organization.

Internal users

Managers, directors, and supervisors who use financial information for decision making.

External users

Investors, creditors, government authorities, and others outside the organization.

Data Analytics

Analyzing data using software and statistics to draw inferences; includes four types.

Descriptive analytics

Analytics that describe what has happened in the business.

Diagnostic analytics

Analytics that investigate why something happened.

Predictive analytics

Analytics that forecast what is likely to happen in the future.

Prescriptive analytics

Analytics that suggest actions to achieve desired outcomes.

Sarbanes-Oxley Act (SOX)

Legislation to improve financial reporting and corporate governance.

Top management certify financial statements

SOX requirement that CEOs/CFOs sign off on the accuracy of financial statements.

Penalties for fraudulent activity

SOX provision that increases penalties for fraudulent financial reporting.

Independence of outside auditors

SOX provision increasing the independence and scrutiny of external auditors.

Debt Financing

Raising outside funds by borrowing money.

Equity Financing

Raising outside funds by issuing stock.

Investing

Acquiring assets and resources needed to operate the business.

Operating

Day-to-day activities of producing and selling goods or services, generating revenues and expenses.

Asset

Resources owned by a business that provide future economic benefits.

Liability

Amounts owed to creditors; an obligation of the business.

Stockholders’ Equity

The owners’ claim to the assets of the business.

Common Stock

The total amount paid in by stockholders for the shares they purchase.

Retained Earnings

Net income retained in the business after dividends are paid.

Revenues

Increases in assets or decreases in liabilities from selling goods or providing services.

Expenses

Costs of assets consumed or services used to generate revenues.

Dividends

Cash payments to stockholders from a corporation’s earnings.

Income Statement

A financial statement that reports revenues, expenses, and net income or loss for a period.

Retained Earnings Statement

A financial statement showing changes in retained earnings due to net income and dividends.

Balance Sheet

A financial statement that shows what a business owns and owes at a point in time.

Statement of Cash Flows

A financial statement that reports cash receipts and cash payments.

MD&A (Management’s Discussion and Analysis)

Management’s discussion of ability to pay obligations, operations, and results.

Notes to the financial statements

Additional clarifications and information accompanying the financial statements.

Auditor’s Report

An independent auditor’s opinion on the fairness of the financial statements.

Basic accounting equation

Assets = Liabilities + Stockholders’ Equity, the foundation of double-entry accounting.

Four financial statements in annual report

The four statements that should appear in an annual report: Income Statement, Retained Earnings, Balance Sheet, and Statement of Cash Flows.