ACCT 2810-Miller: Exam 1 (Chapters 1-3)

Service Business

Provides services rather than products to customers.

What type of business are these companies: (Delta Airlines, Hairmasters, Tailgate Guys)

Service Business

Merchandising Business

Sells products purchased from other businesses to customers

What type of businesses are these?: (Wrapsody, AU Bookstore, Auburn Art)

Merchandising Business

Manufacturing Business

Changes basic inputs into products that are sold to customers.

What type of businesses are these?:(Baxter International, Hyundai)

Manufacturing Business

Proprietorship

A business owned by one individual.

Limited Liability Company (LLC)

A form of corporation that combines attributes of a partnership and a corporation.

Partnership

A business owned by two or more individuals.

Corporation

A business organized under state or federal statutes as a separate legal entity.

Easiest Form of Businesses to Form?

Proprietorship, Partnership

Most Complex of Business to Form?

Corporation

Moderate Difficult Business to Form?

Limited Liability Company (LLC)

Which forms of companies have no legal liability?

Proprietorship, Partnership

Which forms of companies have limited legal liability?

Corporation, Limited Liability Company (LLC)

Which forms of companies have the pass-through entity?

Proprietorship, Partnership, LLC but by election

Which form of business is taxable?

Corporation

Which business(es) has the most restricted access to capital?

Proprietorship

Which business(es) has an average access to capital?

Partnership, Limited Liability Company (LLC)

Which business(es) has the most access to capital?

Corporation

How does businesses earn a profit?

by providing goods and services to customers

What is the profit equation?

Revenues-Expenses=Net Income/Net Loss

Low-Cost Strategy

A strategy where a company designs and produces products or services at a lower cost than its competitors.

Premium-Price Strategy

A strategy where a company tries to design and produce products or services that serve unique market needs, allowing it to charge premium prices.

What are some examples of some low cost strategies businesses?

Southwest, Super 8, Hyundai

What are some examples of some premium-price strategies businesses?

BMW, Ritz-Carlton, and Virgin Atlantic

Common Stock

The basic type of stock issued to stockholders of a corporation when a corporation has issued only one class of stock.

Who are capital market stakeholders?

banks, owners, stockholders

Who are product or service market stakeholders?

Customers and suppliers

Who are government stakeholders?

Federal, State, and City governments

Who are internal stakeholders?

Employees and Managers

What are examples of Financing Activities?

Borrowing from a 3rd party

Owner Investments in the Business

What are examples of Operating Activities?

Use of assets to earn revenues and profits

(Revenues < expenses = net loss; Revenues > expenses = net income)

What are examples of Investing Activities?

Use of business assets to acquire more assets:

-tangible (machinery, buildings, computers, etc.)

-intangible (patents and goodwill)

Accounts Payable

Liability when a company borrows from a vendor or supplier

Bonds Payable

Long-Term Financing

Interest Payable

what any interest due is reported as

Note Payable

Payment of an amount borrowed plus interest, can be long or short term

Tangible Assets

Assets that have physical characteristics (equipment, machinery, automobiles, buildings, land, office equipment, etc.)

Intangible Assets

Include assets such as patents, goodwill, and copyrights

Sources of Revenue

Fees Earned

Sales

Expenses

-Cost of goods sold, cost of merchandise sold, or cost of sales

-Selling expenses (advertising, sales salaries, delivery expense, etc.)

-Administrative expenses (wages, rent, insurance, utilities, depreciation, supplies, etc.)

Definition of Accounting

the process of identifying, measuring, recording, and communicating financial informationabout a company's business activities so stakeholders can make informed decisions.

Why is accounting information used?

it helps people answer questions and make better decisions.

The Language of Business

Accounting

Financial Accounting

Associated with preparing reports for external users of a business

Mangerial Accounting

Used to guide management in making financing, investing, and operations decisions for the company

Objectives of Financial Accounting

-To report the financial condition of a business at a point in time.

-To report changes in the financial condition of a business over a period of time.

The Basic Financial Statements

Income Statement, Statement of Stockholders' Equity, Balance Sheet, and Statement of Cash Flows

Income Statement

reports how well a company has performed its operations (revenues, expenses, and net income/loss) over a period of time.

Statement of Stockholder's Equity reports

reports the changes in the stock accounts and retained earnings over a period of time.

Balance Sheet

reports the resources owned by a company (assets) and the claims against those resources (liabilities and stockholders' equity) at a specific point in time.

Statement of Cash Flows reports

reports the sources and uses of a company's cash over a period of time.

Things the Income Statement can shows

-Summary of revenues earned and expenses incurred for a specific period of time (month, quarter, or year).

-Reports the change in financial condition due to the operations of a company.

-Revenues: increases in resources from providing goods or services to customers.

-Expenses: uses of goods or services in order to earn revenue.

-Revenues minus expenses = Net Income (Loss)

Things the Balance Sheet shows

Assets, Liabilities, Stockholders' Equity

Things the Statement of Stockholders' Equity shows

Reports the changes in financial condition due to changes in stockholders' equity for a period

Things the Statement of Cash Flows reports

Reports the change in financial condition due to the changes in cash during a period

Statement of Cash Flows contains

Net cash flow from operating, financing, and investing activities

Operating activities

-Primary focus of a company's stakeholders

-Concerns the employees, managers, suppliers, customers, and other stakeholders interested in the long-term success of the company

Investing Activities

-Includes cash receipts from selling property, plant, and equipment

-Cash used to purchase property, plant, and equipment is reported as cash payments

Financing Activities

-Any cash receipts from issuing debt or stock

-Any cash payments of debt and dividends

Order the Financial Statements are prepared

Income statement

Statement of stockholders' equity

Balance sheet

Statement of cash flows

Institutions that develop and regulate accounting principles and concepts

GAAP, SEC, FASB, and IASB

Business Entity

Company is viewed as an entity separate from its owners, creditors, or other companies

Cost

Assets in the accounting records should be recorded at their cost or purchase price

Going Concern

Assumption that a company will continue in business indefinitely

Unit of Measure

All economic data are to be recorded in dollars

Matching

-Expenses are matched against the revenues they generate

-Based on revenue recognition and expense recognition principles

Objectivity

Entries in the accounting records and the data reported on financial statements should be based on verifiable or objective evidence

Adequate Disclosure

Financial statements should contain the necessary information that a stakeholder requires to understand the financial condition of a company

Accounting Period

Accounting data should be recorded and summarized in financial statements for periods of time

Factors that Promote Accounting Frauds

-Failure of individual character

-Culture of greed and ethical indifference

Failure of Individual Character

Managers and accountants perform ethical violations to avoid pressures from supervisors

Culture of Greed and Ethical Indifference

Senior managers create a culture of greed and indifference to the truth

Generally Accepted Accounting Principles (GAAP)

Rules for the way financial statements should be prepared.

International Accounting Standards Board (IASB)

An authoritative body that establishes accounting principles and practices for companies in many countries outside of the United States.

Securities and Exchange Commission (SEC)

An agency of the U.S. government that has authority over the accounting and financial disclosures for corporations whose stock is traded and sold to the public.

Financial Accounting Standards Board (FASB)

The authoritative body that has the primary responsibility for developing accounting principles.

Transaction

An economic event that under GAAP affects the financial statements(two or more items within a financial statement).

May affect only assets or may affect both sides of the accounting equation.

Accounting Equation

Assets = Liabilities + Stockholders' Equity

Must balance

Accounting Equation

Ending cash on Statement of Cash Flow must equal

Cash on the Balance Sheet

Net Income on the Income Statement must equal

Net Effects of Revenues/Expenses on Retained Earnings

Things that decrease Stockholders' Equity

Paid Dividends, Incurred Expenses

Things that increase Stockholders' Equity

Issued Common Stock and Earned Revenues

Expenses decrease

retained earnings

Common-Sized Financial Statements

prepared by expressing financial statement amounts as a percent of a base amount

Common-Sized Income Statements

expresses income statement amounts as a percent of sales

Common-Sized Balance Sheet

expresses each asset as a percent of total assets

Cash Basis

Transactions are recognized as cash is exchanged

Revenue is recognized

when it has been EARNED

Expenses should be matched with

the revenues they helped produce.

Accural Basis Accounting

Recognizes Revenue and Expenses based on rules (GAAP- generally accepted accounting principles).

Allows adjustments

Accrual Basis Accounting

Deferrals

-These adjust accounts that are already part of a company's accounting records

-Cash is received before earnings process is complete

-Cash is paid for something that the company will benefit from in the future

Types of Deferrals

Deferred Expenses and Deferred Revenues

Accruals

-These record expenses or revenues that have not been previously recognized in the accounting records

-Cash has not been received/paid, but the earnings process is complete or the expense relates to the current period.

Types of Accruals

Accrued Revenues and Accrued Expenses

Depreciation

Reduction in the ability of a fixed asset to provide service over time

Accumulated Depreciation

-A contra asset account

-Added to the Balance Sheet column to maintain a record of the original cost of a fixed asset for tax and other purposes