Chapter 1: Business Decisions and Financial Accounting

Sole Proprietorship

__________ is a type of business ran by one person who is liable for all debts of the business. No legal maneuvers are necessary.

Partnership

A(n) __________ is a type of business owned by 2 individuals who are both liable for the debts of their business. Easiest business to start, no lawyer needed to create. The profits or losses are split between the owners

Corporation

A ___________ is a type of business that is a separate legal entity that is formed by documents filed with a state.
- Income taxes are paid by the corporation and the owners
- Can be a public or private company

Public company

In a __________, your stock is readily available to be bought by customers.

Private company

In a ___________, your stock is bought and sold privately and are not accessible to the general public.

Initial Public Offering (IPO)

The first day that stock is available to the general public, aka "going public", is called the ___________.

Limited Liability Companies (LLC)

A company that is a combination of a corporation and a sole proprietorship or a partnership is called a ___________ and you must file with the state to be created.

Limited liability

Access to pass through income taxation

Can be taxed as a partnership if owned by two owners

The three main characteristics of Limited Liability Companies are:

Managerial Reports

____________ are for internal users and reports on operating activities of a business.

Financial Statements

___________ are for external users and create periodic statements.

Creditors, investors, directors, and government

What are the four types of external users?

Operating

___________ activities generate profit and involve short term expenses. They are the simple actions of running a business like buying supplies.

Investing

___________ activities are the process of buying and selling long term assets like equipment.

Financing

___________ activities are formal actions like borrowing money from a bank and paying loans.

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Equation for the basic accounting equation:

Separate Entity Assumption

The financial reports are assumed to consist only that business's activities.

Assets

Resources the company owns and will benefit from in the future
Ex: cash, supplies, equipment

Liabilities

What a company owes to creditors
Ex: Accounts Payables, Notes Payable

Stockholders' Equity

What is owed to the owner of a business.
Common stock and Retained Earnings

Common Stock

Equity that is PAID by stockholders to get stock.

Retained Earnings

Equity EARNED by the company.

Revenues

The amounts we earn from selling goods or services

earned

Revenues are recorded when __________.

Expenses

The cost of what is needed to earn revenue.

incurred

Expenses are recorded when ___________.

Net Income

When revenues are greater than expenses, we have ___________.

Net Loss

When expenses are greater than revenue, we have __________.

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The equation to calculate Net Income/Loss

Dividends

___________ are paid to stockholders' as a repayment for their investments towards the company.
They are a component of Retained Earnings

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

The order that financial statements are prepared is:

Monthly, quarterly, or annually

Financial statements can be prepared:

calendar year

A ___________ ends on December 31.

fiscal year

A __________ ends on a date that is not December 31.

Name of the company, type of statement, and the accounting period

A heading for a financial statement includes:

Income Statement

The __________ provides information regarding profitability and includes revenues, expenses, and net income/loss

Unit of measurement assumption

Under this, the appropriate monetary unit should be used for business activities. Ex: the United States uses the American dollar.

Statement of Retained Earnings

In the __________, there is information regarding the effects of the distributions of dividends. Under this statement, you'll see Retained Earnings (beg.), Net Income/Loss, Dividends, and Retained Earnings (end.)

Balance Sheet

The __________ is a snapshot of a business's resources specific date. Listed under this financial statement are assets, liabilities, and stockholders' equity.

Cost principle

Under the __________, assets are recorded based on what we agreed to pay for them.

Statement of Cash Flows

The statement that records operating, financing, and investing activities is called the __________. You will also see the reported Change in Cash (shows if a business is making enough money to pay the amounts it owes).

long term return

The Income Statement provides the stockholders with what the ________ is.

distributed to investors

The Statement of Retained Earnings shows the returns through dividends that are to be ________.

cover their liabilities

The Balance Sheet allows creditors to see if the business’s assets will ________.

the amounts it owes

The Statement of Cash Flows shows if a business is making enough money to pay ________.

Verifiable
Timely
Comparable
Understandable

When external users view statements, they should be:

FASB

The Financial Accounting Standards Board (United States)

GAAP

Generally Accepted Accounting Principles (United States)

IASB

International Accounting Standards Board

IFRS

International Financial Reporting Standard