Financial Accounting: Tools for Business Decision Making - Chapter 1 Flashcards

Flashcards covering the key concepts from Chapter 1 of Financial Accounting: Tools for Business Decision Making, Tenth Edition. Topics include forms of business organization, users of financial information, the fraud triangle, types of business activities, financial statements, and the elements of an annual report.

What are the three forms of business organization?

Sole proprietorship, partnership, and corporation.

What are hybrid forms of organizations?

These combine the tax advantages of partnerships with the limited liability of corporations. Common types include LLCs and Subchapter S corporations.

Who are internal users of financial information?

Marketing managers, production supervisors, finance directors, and company officers.

Who are external users of financial information?

Investors, creditors, taxing authorities, regulatory agencies, customers, labor unions, and economic planners.

What are the three factors that contribute to the fraud triangle?

Opportunity, rationalization, and financial need.

What is the Sarbanes-Oxley Act (SOX)?

Legislation passed to reduce unethical corporate behavior and financial scandals, requiring internal controls and auditor attestation.

What are the three principal types of business activity?

Financing, investing, and operating.

What are financing activities?

Activities related to obtaining funds, such as borrowing money (debt financing) and issuing stock (equity financing).

What are investing activities?

Activities involving the purchase of resources (assets) needed to operate the business, such as land, buildings, and equipment.

What are operating activities?

Activities involving the day-to-day actions to produce and sell a product or provide a service, resulting in revenues and expenses.

What are revenues?

Amounts generated from the sale of goods or performance of services.

What are expenses?

Costs consumed or services used in the process of generating revenue.

What is net income?

The result when revenues exceed expenses.

What is net loss?

The result when expenses exceed revenues.

What are the four financial statements?

Income statement, retained earnings statement, balance sheet, and statement of cash flows.

What does the income statement report?

Revenues and expenses for a specific period of time, resulting in net income or net loss.

What does the retained earnings statement show?

Amounts and causes of changes in retained earnings during a period, including net income and dividends paid.

What does the balance sheet report?

Assets, liabilities, and stockholders’ equity at a specific point in time, based on the accounting equation: Assets = Liabilities + Stockholders’ Equity.

What does the statement of cash flows provide answers to?

Where did cash come from during the period? How was cash used during the period? What was the change in the cash balance during the period?

What elements does an annual report include?

Financial statements, management discussion and analysis, notes to the financial statements, and auditor's report.

What is the Management Discussion and Analysis (MD&A)?

Management’s view on the company’s ability to pay obligations, fund operations, and its results of operations, including favorable/unfavorable trends.

What are Notes to the Financial Statements?

Provide more detail to clarify the financial statements, including accounting policies, assumptions, estimates, and uncertainties.

What does the Auditor's Report state?

Report on the fairness of the presentation of the financial position and the results of operations in conformance with GAAP or IFRS.

What are International Financial Reporting Standards (IFRS)

Accounting standards used internationally that tends to be simpler and more principles-based.

What are Generally Accepted Accounting Principles (GAAP)?

Accounting standards used in the United States that are more detailed and rules-based.