TAMU ACCT 229 - Exam 1

3 types of businesses

sole proprietorship, partnership, corporation

unlimited liability

sole proprietorship & partnership

limited liability

corporation

Sole Proprietorship

one owner

advantage: easy to form

separate entity for accounting purposes

not a separate entity for legal purposes or tax purposes

Partnership

two or more owners

separate entity for accounting purposes

not a separate entity for legal or tax purposes

Corporations

business incorporated under the laws of a particular state.

Advantages: limited liability, continuity of life, ease in transfer of stock (ownership), opportunity to raise large amounts of money by selling shares of stock to a large number of people.

3 types of business activities

financing, investing, operating

Operating Activities

everyday activities

-sell inventory, pay employees

Investing Activities

how you grow your company

-buying building, equipment, vehicles, fixtures

Financing Activities

how you pay for your growth

-borrow money: temporary financing

-issue stock: permanent

4 financial statements

Income statement

Statement of Retained Earnings

Balance Sheet

Statement of Cash Flows

What does a balance sheet show?

Shows the financial position of a company at a point in time. A = L + SHE

Assests

what a company owns, or what is owed to a company

Laiabilities

what the company owes

Stockholders Equity

ownership. (common stock & retained earnings)

Monetary Unity Assumption

Only transactions that can be expressed in terms of money can be included in the accounting records

Economic Entity Assumption

Activities of the business are separate from activities of the owners

Time Period Assumption

The long life of a company can be reported over a series of shorter time periods. Makes it possible to prepare the Income Statements for a specific time period.

Going Concern Assumption

The company will not go out of business in the near future. Not liquidating.

Historical Cost Principle

record assets at the cost paid to acquire them

Full Discloser Principle

Provide all information sufficiently important to influence decision

GAAP

Generally Accepted Accounting Principles. Rules and assumptions under which financial statements must be prepared. (USA).

SEC

Securities and Exchange Commission.

-ultimate authority -THE ENFORCER

FASB

Financial Accounting Standards Board.

-sets accounting standards in the US

AICPA

American Institute of Certified Public Accountants.

-advises FASB. Professional organization for CPAs

PCAOB

Public Company Accounting Oversight Board.

-set audit standards

IASB

International Accounting Standards Board.

-created in 2001. Developed world wide accounting standards

IFRS

International Financial Reporting Standards. (principle based)

-US adoption

-many countries currently using

Sarbanes-Oxley (SOX) Act (2002)

-address the problems with financial reporting after 2001-2002. ALL publicly traded companies and any international companies that trade in the US stock exchange must comply with this law.

Key provisions of SOX (management)

1. asses and report the effectiveness of the company's internal control structure and procedures.

2. code of ethics established and reported.

3. if the financial statements are inaccurate or incomplete SOX requires the CEO and CFO to certify annual financial statements.

4. Firms must provide a mechanism for anonymous reporting of fraudulent activities (whistle-blower protection).

Key provisions of SOX (board of directors)

1. Composition of the Board of Directors requires some directors to be independent of management

2. Audit committee members be independent of management

Key provisions of SOX (the external auditors)

1. stronger rules regarding auditor independence. audit firms can no longer provide management consulting services to its audit clients

2. Auditors report to the clients audit committee rather than to the clients management team

Key provisions of SOX (enforcement)

1. PCAOB (public company accounting oversight board) has the power to regulate auditing firms

2. all accounting firms that audit publicly traded companies must register with the PCAOB and follow its rules

Business

all activities necessary to provide the members of an economic system with goods and services

Understandability

information should be comprehensible to those who are willing to spend time to understand it.

Relevance

capacity of information to make a difference in a decision

Faithful Representation

is complete, neutral, and free from error

Comparability

allows user to analyze two or more companies and look for similarities or differences.

-compare company one 8/2016 to company 2 8/2016

Consistency

allows comparisons within a company from one accounting period to the next.

-compare company 1 8/2016 to company 1 8/2015

Materiality

the dollar magnitude of the transaction makes a difference in how it is recorded. Does an error in any way affect the judgment of someone relying on the information.

Conservatism

dont overstate assets or revenues, dont understate liabilities or expenses. Use least optimistic estimate when two estimates of amounts are about equally likely

How to analyze profitability

Gross Profit Ratio

Profit Margin

Gross Profit & Ratio

ratio of gross profit to sales.

Rev - COGS = Gross Profit

GP/Sales = GPR

Profit Margin

Return on sales - ratio of net income to sales. Shows profitability of company.

net income/Sales = profit margin

How to analyze liquidity

Working Capital

Current Ratio

Working capital

current assets - current liabilities

Current ratio

current assets/current liabilities

Assets

future economic benefits (resources) owned by or owed to the firm

cash

current asset

MES (marketable equity securities)

current asset

Accounts Receivable

current assets

Inventory

current assets

Supplies (on hand)

current assets

Prepaid Expenses

current assets

Land

non-current assets

Building

non-current assets

Equipment

non-current assets

Furniture & Fixtures

non-current assets

Vehicle

non-current assets

Accumulated Depreciation

non-current assets (CONTRA ASSET)

Plant, Property, & Equipment (fixed assets)

acquired for use in business rather than resale to customers.

Land, building, equipment, Furniture and fixtures, vehicles, AD

Intangible Assets

lack physical substance, but help to generate revenue

Intangible Assets

patent, trademark, copyright, franchise, goodwill

accounts payable

current liability

wages payable

current liability

accrued expense

current liability

unearned revenue

current liability

notes payable

current liability

stockholder equity

claims of owners against the net assets of the firm

Statement of Cash Flows

identifies sources and uses of cash