Accounting #1

sole proprietorship

-simple to establish

-owner-controlled

-tax advantages

partnership

-simple to establish

-shared control

-broader skills and resources

-tax advantages

corporation

-easier to transfer ownership

-easier to raise funds

-no personal liability

internal users

people within the organization

external users

investors and creditors

financing, investing, and operating

3 types of business activity

liabilities

amounts owned

common stock

amount paid by stockholder for shares they purchase

dividends

payments to stockholders

assets

resources owned by the business ex. computers

revenue

amounts earned from the sale of products and other sources

inventory

tangible goods available for sale to customers

accounts receivable

right to receive money from a customer as the result of a sale

-Borrowing money (debt)

-Selling share of stock for cash (equity)

financing activities

-purchase of resources a company needs to operate or assets

Investing activities

-revenue

-inventory

-accounts receivable

-expenses

-liabilities

-net income/loss

operating activities

expenses

cost of running a business/ of assets consumed or services used

assets, liability, owner’s equity, revenue, expenses, dividends

6 basic elements of accounting

equity

ownership

current assets

expected to be converted to cash

ex. cash, accounts receivable, and inventory

current liabilities

will be paid within the current reporting period

ex. accounts payable, short-term loans, accrued liabilities (interests, utilities, and salaries)

liquidity

how easily cash can be converted

long term assets

not intended to be turned into cash or be consumed within 1 year

ex. property/plant/equipment, goodwill, long-term investments

goodwill

intangible asset

ex company buys another for more than what it is worth

long term liabilities

will not be paid within 1 year

ex. long term loans, pension, and bonds payable

No it is neither

Can owner’s equity be classified as long-term or current?

balance statement, income statement, cash flow statement, and retained earnings statement

4 financial statements

a snapshot of a certain date

Balance sheet is

change over time

income and cash flow observes

income statement

looks at revenue and expenses and sums it into net income/loss for a specific period of time

net income/loss

What is needed from the income statement to prepare retained earnings statement?

retained earnings statement

shows amounts and causes of changes in retained earnings during period. Same period of time covered as the income statement. Includes dividends

Ending balance

What is needed from the retained earnings statement to prepare a balance statement?

balance sheet

reports assets and claims to assets at a specific point in time. Assets come first followed by liabilities and stockholders equity

Amount of cash

What is needed from the balance sheet to prepare a cash flow statement?

cash flow statement

shows where cash came from, how cash was used, and the change in cash balance during the period

profitability ratio

measure income or operating success of a company for a given period of time

ex. earnings per share

earnings per share

measures the net income earned on each share of common stock

liquidity ratios

measure short-term ability of company to pay its maturing obligations and to meet unexpected needs for cash

ex. current ratio

current ratio

quotient of the amounts of current assets over current liabilities

solvency ratios

measure the ability of a company to survive over a long period of time

ex. debt to asset ratio

debt to assets ratio

measures the % of total financing provided by creditors rather than stockholders

free cash flow

describes net cash provided by operating activities after adjusting for capital expenditures and dividends paid

sustainable income

most likely level of income to be obtained in the future

comprehesive income

certain gains and losses that bypass net income are reported as part of a more inclusive earnings. Is the sum of net income and other comprehensive income items

ex. trading securities and available-for-sale securities

quality of earnings

provides full and transparent info that will not confuse or mislead users

pro forma income

using your own rules to calculate income

horizontal analysis

used for evaluating a series of financial statement data over a period of time

vertical analysis

allows for comparison within the same industry between companies