Acct Exam 1

Sole Proprietorship

One owner

Adv: Easy to form

Disadv: "Unlimited liability" (The owner is responsible for the company's debt)

Separate entity for accounting purposes, NOT a separate entity for tax purposes.

Partnership

Two or more owners

Disadv: "Unlimited liability" (The owners are responsible for the company's debt)

Separate entity for accounting purposes, NOT a separate entity for tax purposes.

Corporation

Sell shares of stock to investors. Owners are called Stockholders.

Fully separate for BOTH accounting & tax purposes.

A Board of Directors is elected by the stockholders (owners) to make decisions that affect the company.

Adv: 1. Limited liability (only lose your investment, can't come after you personally)

2. Continuity of Life / Ease in transfer of ownership

3. Opportunity to raise large capital through stock

Disadv: Double taxation

Economic Entity Concept

The concept that the accounting for an economic entity's activities be kept separate and distinct from the accounting for the activities of its owner and all other economic entities.

Accounting

Purpose is to identify, measure (in $) & communicate information about a company that is useful in making economic decisions.

Internal

Type of group including Management, CEO, CFO. Budgeting/Planning

External

Type of group (outside the company) including Stockholders (owners), Creditors (bank, people we owe money to), and the Government (IRS, SEC). Profitable and Liquidity.

Financing Activities

How a company pays for growth/expansion.

Borrowing (liabilities), Selling Ownership Interest (Stock)

How does a company finance its activties?

Investing Activities

Acquiring resources (assets) to be used in our day-to-day operations (growth).

Operating Activities

Activities that earn revenue & generate expenses (What your company does every day).

Revenue

The inflow of assets (cash and accounts receivable)

Expenses

Outflow (using up) of an asset to help generate revenue.

Income Statement, Statement of Retained Earnings, Balance Sheet, Statement of Cash Flows

List the order of the Financial Statements.

Income Statement

Shows the results of operations for a period of time.

Revenue $XX

• Expenses (XX)

= Net Income XX

Statement of Retained Earnings

Net Income over the life of the company, less any dividends. Shows how net income & dividends causes change in a company's financial position during a period of time.

Beg RE $XX

• Net Income XX

• Dividends (XX)

= End RE XX

Balance Sheet

Shows the financial position of a company at a point in time.

Assets = Liabilities + ShareHolder's Equity

Statement of Cash Flows

Financial statement with 3 sections (same as 3 business activities). Shows sources and uses of cash.

1. Operating

2. Investing

3. Financing

Multi-Step Income Statement

Shows results of the company's operations (flows of revenues and expenses) for a period of time.

Sales Revenue $XX

• COGS (XX)

Gross Profit $XX

• Operating Expenses:

Wage Exp (XX)

Rent Exp (XX)

Insurance Exp (XX)

Utilities Exp (XX)

Income from Operations $XX

• Gains XX

• Losses (XX)

• Interest Revenue XX

• Interest Exp (XX)

Income Before Taxes $XX

• Income Tax Exp (XX)

NET INCOME $XX

Statement of Stockholder's Equity

Shows how net income, dividends, and changes in stock cause changes in a company's financial position during a period of time.

Beg RE $XX

• New Stock XX

• Net Income XX

• Dividends (XX)

= End RE XX

Current Assets

Converted into cash, sold or used up during current period (within 12 months). (Order in Liquidity Down Below)

1. Cash

2. Marketable Security

3. Accounts Receivable

4. Inventory

5. Supplies

6. Prepaid Expense

Non-Current Assets

Assets longer than 1 year.

1. Long-Term Investments

2. Plant, Property & Equipment:

1. Land

2. Building

3. Equipment

4. Furniture & Fixtures

5. Vehicle

6. Accumulated Depreciation (Contra-Asset)

Intangible Assets

Other assets.

1. Patent

2. Copyright

3. Trademark/Tradename

4. Franchise/Licenses