Chapter 1: Business Organizations and Accounting

Flashcards covering key concepts from Chapter 1 lecture notes, including business organizations, accounting fundamentals, data analytics, business activities, and financial statements.

What are the three primary forms of business organizations?

Sole Proprietorship, Partnership, and Corporation

Describe a sole proprietorship and provide an example.

A business owned by one person; e.g., barber shops or auto repair shops.

Describe a partnership and provide an example.

A business owned by two or more people; e.g., professional practices like lawyers or CPAs.

Describe a corporation.

A separate legal entity owned by stockholders.

What are the advantages of a sole proprietorship?

Simple to establish, owner controlled.

What are the advantages of a partnership?

Simple to establish, shared control, broader skills and resources.

What are the advantages of a corporation?

Easy to transfer ownership, greater capital raising potential, lower legal liability.

What is the primary function of accounting?

To provide financial information for decision making.

Who are the two main categories of users interested in financial reports?

Internal users and external users.

Who are internal users of accounting information?

Managers who plan, organize, and run a business.

What is an example of a question an internal user (e.g., Marketing) might ask?

What price should we charge for our product to maximize company income?

Who are external users of accounting information?

Investors and Creditors.

What is an example of a question an external user (e.g., an investor) might ask?

Is the company's net income sufficient?

What is an example of a question an external user (e.g., a creditor) might ask?

Will the company be able to pay back the debt?

What question does descriptive analytics ask?

What happened?

What question does diagnostic analytics ask?

Why did it happen?

What question does predictive analytics ask?

What is likely to happen?

What question does prescriptive analytics ask?

What should we do about it?

What are the three types of business activities?

Financing, Investing, and Operating.

What are financing activities?

Activities that involve raising cash from outside sources by borrowing or issuing stock.

What is a liability?

Amounts owed to creditors or others for amounts borrowed.

What is common stock?

The total amount paid by stockholders for shares of ownership in a company.

What is a dividend?

Payments made to stockholders from the net earnings of a company, if any.

What are investing activities?

Activities that involve purchasing or selling long-term assets (like buildings, land, equipment) or investments in other companies.

What are assets?

Resources owned by a company.

Provide two examples of assets.

Cash and equipment.

What are operating activities?

The day-to-day actions taken by a company to produce and sell products or provide services.

What is revenue?

The increase in assets (cash or receivables) resulting from the sale of products or services during the normal course of business.

What are expenses?

The cost of assets consumed or services used to generate revenue.

What is net income?

The result when revenues are greater than expenses.

What is the formula to calculate net income (or net loss)?

Revenues - Expenses = Net Income (or Net Loss).

What are the four main financial statements?

An Income Statement, a Statement of Retained Earnings, a Balance Sheet, and a Statement of Cash Flows.

What does the Income Statement report?

The success or failure of a company's operations for a specific period of time by summarizing all revenues and expenses.

What figure is transferred from the Income Statement to the Retained Earnings Statement?

Net Income (or Net Loss).

What does the Retained Earnings Statement report?

The amounts and causes of changes in retained earnings for a specific time period, including net income/loss and dividends.

What is the formula for calculating ending retained earnings?

Beginning Retained Earnings + Net Income (or - Net Loss) - Dividends = Ending Retained Earnings.

What figure is transferred from the Retained Earnings Statement to the Balance Sheet?

Ending Retained Earnings.

What does the Balance Sheet report?

The balances of assets, liabilities, and stockholders' equity at a specific point in time.

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

Assets = Liabilities + Stockholders' Equity.

What figure on the Balance Sheet should match the ending cash balance on the Statement of Cash Flows?

The cash balance.

What does the Statement of Cash Flows report?

Cash inflows and outflows resulting from operating, investing, and financing activities during a specific period.

What is an annual report?

A report that publicly traded U.S. companies are required to provide shareholders, which always includes financial statements.

What information is included in the Management Discussion & Analysis (MD&A) section of an annual report?

Information on the company's ability to pay near-term obligations, fund operations and expansion, and results of operations.

What is the purpose of the notes to financial statements?

To clarify information, as well as accounting policies or uncertainties presented in the financial statements.

Who is an auditor?

A CPA or professional accountant who conducts an independent examination of a company's financial accounting data.

What does an Auditor's Report indicate?

Whether the financial statements and notes comply with accounting standards.

What does it mean when an auditor gives an "unqualified" opinion?

It means the auditor has no reservations concerning the material validity of the presented financial information, indicating compliance with accepted accounting standards.