Chapter 1 - Fundamentals of Financial Accounting (Ch. 1) Flashcards

Flashcards covering Chapter 1 topics: organizational forms, users of financial information, the basic accounting equation, assets, liabilities, stockholders' equity, revenues/expenses/net income, dividends, retained earnings, and the four basic financial statements.

What are the three main types of business organizations described in the notes?

Sole proprietorship, partnership, and corporation.

Which business form is owned by one person and where the owner is personally liable for all debts?

Sole proprietorship.

Which business form is owned by two or more people and where each partner is personally liable for debts?

Partnership.

Which business form is a separate legal entity from its owners and provides limited liability to stockholders?

Corporation.

Who are external users of a company's financial statements as listed in the notes?

Creditors, investors, directors, and government.

What is the purpose of managerial accounting reports?

For internal use by the company's employees to aid decision making in production, marketing, HR, and finance.

What is the purpose of financial accounting reports (financial statements)?

To provide information to external users not employed by the business.

State the basic accounting equation.

Assets = Liabilities + Stockholders' Equity.

Which assumption states that the business is separate from its owners and reports focus only on the business's activities?

Economic entity (entity) assumption.

Assets are best described as what?

Economic resources controlled by the company that have measurable value and future benefit.

Name some typical asset accounts mentioned in the notes.

Cash, Accounts Receivable, Supplies, Equipment, Software (as examples).

What are Liabilities in accounting?

Measurable amounts the company owes to creditors (e.g., Accounts Payable, Note Payable).

What is a note payable?

A liability representing a bank loan evidenced by a promissory note detailing the repayment.

What is Accounts Payable?

A liability representing amounts owed to suppliers on credit (on account).

What does Stockholders' Equity represent?

Owners' claims to the company resources.

What are the two components of Stockholders' Equity mentioned in the notes?

Paid-in Capital (e.g., Common Stock) and Earned Capital (Retained Earnings).

What does Net Income represent in relation to Revenues and Expenses?

Net Income = Revenues − Expenses.

What are Dividends? Are they an expense?

Distributions of a company's earnings to stockholders; not an expense.

What is the formula for the Statement of Retained Earnings?

Beginning Retained Earnings + Net Income − Dividends = Ending Retained Earnings.

Which Retained Earnings balance is reported on the Balance Sheet?

Ending Retained Earnings.

What is the purpose of the Balance Sheet?

To report assets, liabilities, and stockholders' equity at a specific point in time.

In what order are assets listed on the balance sheet and why?

In order of liquidity, i.e., how quickly they are used up or converted to cash.

What is the basic accounting equation used on the Balance Sheet?

Assets = Liabilities + Stockholders' Equity.

What are the four basic financial statements and their typical order?

Income Statement; Statement of Retained Earnings; Balance Sheet; Statement of Cash Flows.

What does the unit of measure assumption state?

Results are reported in a common monetary unit.

What type of income statement is shown in the Noodlecake example?

Single-step income statement.

What are the two main ways earnings can affect stockholders’ equity?

Net income (earned capital) can be retained in the company; dividends can be distributed to stockholders.