Accounting Chapters 1-4

Sole Proprietorship

A business owned by one person.

Advantages of a Sole Proprietorship

Simple to establish, Owner Controlled, Tax advantages.

Examples of Sole Proprietorships

Barber shop, auto repair shop, small businesses.

Partnership

A business owned by two or more people called partners.

Advantages of a Partnership

Simple to establish, Shared control, Broader skills and resources, Tax advantages.

Typical Partnership Businesses

Retail and service businesses, including lawyers, doctors, accountants.

Corporation

A business organized as a separate legal entity and owned by stockholders.

Advantages of a Corporation

Easier to transfer ownership, Easier to raise funds, No personal liability.

Disadvantage of Sole Proprietorship and Partnerships

Proprietors and partners are personally liable for all debts and legal obligations.

Business with Highest Revenue in the U.S.

Corporation.

Accounting

The information system that identifies, records, and communicates the economic events of an organization to interested users.

Internal Users of Accounting Information

Managers who plan, organize, and run a business.

External Users of Accounting Information

Investors, Creditors, Taxing authorities, Customers, Labor Unions, Regulatory agencies.

Sarbanes-Oxley Act (SOX) Purpose

To reduce unethical corporate behavior and decrease the likelihood of future corporate scandals.

Three Principal Business Activities

Financing, Investing, Operating.

Purpose of Accounting Information System

To keep track of each of the business activities.

Sources of Outside Financing for Corporations

Borrowing money (debt financing) and Issuing shares of stock (Equity Financing).

Creditor

The persons or entities a business owes money to.

Amounts Owed to Creditors

Liabilities.

Examples of Liabilities

Notes payable, Bonds payable.

Common Stock

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

Dividend

The cash payments to stockholders.

Investing Activities

The purchase of resources a company needs in order to operate.

Assets

Resources owned by a business.

Revenue

The increase in assets or decrease in liabilities resulting from the sale of goods or the performance of services.

Types of Revenue Used by Columbia Sportswear

Sales revenue, Service revenue, Interest revenue.

Supplies

Assets used in day to day operations.

Inventory

Goods available for future sale to customers.

Accounts Receivable

The right to receive money in the future.

Expenses

The cost of assets consumed or services used in the process of generating revenue.

Examples of Columbia Sportswear Expenses

Cost of goods sold, Selling expense, Marketing expense, Administrative expense, Interest expense, Income tax expense.

Accounts Payable

The obligation to pay for goods and services bought on credit from suppliers.

Net Income

When revenue exceeds expenses.

Net Loss

When expenses exceed revenue.

Four Financial Statements

Income statement, Retained earnings statement, Balance sheet, Statement of cash flows.

Income Statement

Reports a company's revenue and expenses, resulting net income or loss for a specific period.

Retained Earnings

The portion of net income retained in a corporation.

Retained Earnings Statement

Amounts and causes of changes in retained earnings for a specific time period.

Balance Sheet

Reports the assets and claims to those assets at a specific point in time.

Basic Accounting Equation

Assets = Liabilities + Stockholders Equity.

Parts of Stockholders Equity

Common Stock, Retained Earnings.

Statement of Cash Flows Purpose

To provide financial information about cash receipts and payments for a specific period.

Annual Report

A report presenting financial information including financial statements, management discussion, and auditor's report.

Management Discussion and Analysis (MD&A)

Presents management's views on the company's ability to pay obligations and results of operations.

Notes to the Financial Statements

Clarify information and provide additional detail in financial statements.

Auditors Report

States the auditor's opinion on the fairness of financial position presentation.

Auditor

An accounting professional who conducts an independent examination of financial statements.

Certified Public Accountant (CPA)

A person who meets certain criteria and is allowed to perform audits of corporations.

Classified Balance Sheet

Groups similar assets and liabilities using standard classifications.

Current Assets

Assets expected to be converted to cash or used up within one year.

Operating Cycle

Time required to purchase inventory, sell it on account, and collect cash.

Liquidity

How easily an asset can be converted to cash.

Order of Liquidity

Cash, Investments, Receivables, Inventory, Prepaid items.

Examples of Long Term Investments

Investments in stocks and bonds, long term assets not currently used.

Property, Plant, and Equipment

Assets with long useful lives used in business operations.

Intangible Assets

Assets that do not have physical substance.

Current Liabilities

Obligations to be paid within the next year.

Long Term Liabilities

Obligations expected to be paid after one year.

Parts of Stockholders Equity

Common stock and retained earnings.

Revenue Recognition Principle

Revenue is recognized in the accounting period in which the service is performed.

Expense Recognition Principle

Expenses recognized with revenues in the period they generate revenue.

Accrual Basis Accounting

Transactions are recorded in the period they occur, even if cash isn't exchanged.

Cash Basis Accounting

Companies record revenue when they receive cash, not following GAAP.

Adjusting Entries

Entries made at the end of a fiscal period to follow revenue and expense principles.

Types of Adjusting Entries

Deferrals and Accruals.

Prepaid Expenses

Expenses paid in cash before they are used.

Depreciation

Allocating the cost of an asset to expense over its useful life.

Unearned Revenues

Cash received before a service is performed.

Adjusted Trial Balance

A list of all accounts and their balances after adjusting entries.

Closing Entries

Transfer temporary account balances to a permanent stockholders equity account.

Accounting Cycle Steps

Analyze transactions, journalize, post, prepare trial balance, adjust, prepare statements.

Debit (Dr)

The left side of an account.

Credit (Cr)

The right side of an account.

Working Capital

Current assets - Current liabilities.

Current Ratio

Current assets / Current liabilities.

Annual Reports Purpose

Presents financial condition and results to shareholders.

Temporary Accounts

Accounts that are closed at the end of the accounting period.

Permanent Accounts

Accounts that carry their balances into future accounting periods.