Financial Accounting Flashcards

Flashcards based on lecture notes covering business objectives, forms of ownership, value creation, and accounting principles.

What is the distinguishing objective of a business?

the objective of a business is to create value

What are the basic forms of business ownership?

sole trader, public company, private company, partnership, close cooperation

What is a key advantage of incorporating a business?

shareholders have limited liability and they are only responsible for the company’s liability up to their investment in the company

What is the main difference between a private company and a public company?

A public company can sell their shares on stock exchange to the public whereas the private company does not but they can get their money from private investors and loan capitals.

What is the primary goal of a non-profit organization?

the goal for a non profit organization is to serve the public and not for profit

According to the Business Entity Concept, how should a business be treated?

a business should be treated as a separate entity from its owners, that is the financial statements of the business should be kept separated from the owner and other business entities.

What is unlimited liability?

unlimited liability means that the owners’ personal assets are at risk that is the owners of the business are responsible for the liability of the business

What is one of the key benefits of incorporation regarding legal standing?

there is limited liability and the profit is taxed at a corporate tax rate and is is taxed separately from the owners’ money

What are the four main categories of decisions or activities through which businesses create value?

financing; dividend; operating; investing

What do financing activities involve?

funding is obtained; raise capital through equity and debt

What is leverage or gearing in business?

leveraging or gearing in a business is using debt to fund the business and this can amplifies the return to the business

What do investing activities involve?

assets are acquired ,

What do operating activities involve?

using the assets to generate income through daily activities

What is the dividend decision?

decide whether to the distribute the profit to the shareholders or to retain it in the business

Name three of the financial statements produced through financial accounting.

the statement of financial position; the statement of cash flows; the statement of comprehensive income

What is the definition of accounting in the context of the accounting landscape?

accounting is the reporting and recording of financial statements about a business

What are the two main types of accounting reporting?

Management accounting and Financial accounting.

what is publics sector

owned by the government to provide service to the public and funds are collected from the taxes and it is governed by the government officials

private sector

it is privately owned; it obtained its funding from loans investments and it is managed by private individuals and if focuses on making profit and competitions

NPO(No profit organization)

• focused on charitable

• NPO Act

• profits reinvested to the organization

• exempted to pay taxes

• private sector

NPC(Not profit company)

• benefit the public

• Company Act

• retain the profit in the business

• private sector

PBO(Public Benefit Organization)

• private sector

• exempted from paying taxes

• benefit the public at large

partnership

• 2 or more people share ownership

close corporation

• smaller than private company

• limited liability

limited liability

the owners are not responsible for the business’s liability/debts

private company

• shareholders

• shares can’t be publicly traded

• limited liability

• investors

public company

• can sell their shares to the public on stock exchange

• limited liability

unincorporated

• business and the owners are considered as one for legal purposes

• unlimited liability

• no separate tax entity for the business

• sole traders and partnerships

advantages of unincorporated

• simplicity

• owners have full control

• tax pass through; business is taxed at the rate of owners’ personal tax rate

disadvantages of unincorporated

• unlimited liability

• hard to raise capital

• lack of continuity in case the owner dies

incorporated

• entity concept

• the business and the owners are regarded as two distinct entities

• limited liability

• shareholders only responsible for the business liabilities up to their investment in the business

• taxed as a separate entity

• profit is taxed at the rate of corporate tax

• e.g private/public company or listed/unlisted company

advantages of incorporated

• limited liability

• easy to raise capital

• perpetual existence

• stable and reliable

disadvantages of incorporated

• cost and complexity

• double taxation

• regulatory requirements

private company

• group of people(shareholders)

• limited liability

• can not issues their shares on stock exchange for public

• raises funds through investors, capital, loans

public company

• issue their shares on stock exchange for public

• limited liability

• controlled by the government

• strict regulatory requirements

listed company

• similar to the public company

• the listed simply means that the shares are listed on stock exchange market

• must comply with strict regulatory requirements

unlisted

• similar to private

• shares not available on public stock exchange

• few regulatory/disclosure requirements

What is value

beliefs of the company include profit and customers’ satisfaction

sustainable value

considers the long term economic and social and environmental impact; it ensures that the business thrives while making that the society is positively impacted and minimizing harm

shareholders

owners of the business who expect financial returns on their investments

stakeholders

all other individuals affected by the business include the employees; customers; suppliers

sustainable business model

aims to balance the shareholders and the stakeholders expectations

value

it can be financial social or environmental

how is value created

through strategic decisions making and business activities

business activities

• financing

• operating

• investment

• dividends

financing activities

• funding is obtained

• raise capital through equity/debt

investing

• assets are acquired

• buy PPE

• expanding the business

operating

• assts are used

• for efficient production and service delivery

dividends

• what happens to the profit

• share it to the shareholders

• or retain in the business

type of decisions

• financing

• investing

• operating

• dividend

financing

how do we raise funds

• debt/equity

• issuing stock or bonds

investing

where to allocate the funds(what area of the business needs to be invested in )

• buy assets (PPE)

OPERATING

how to run the business

• how to use these assets to generate value

dividend

what happens to the value created

• do we reinvest it

• do we distribute

capital structure

equity / debts

debt financing activities

burrowing money from banks or bond to fund a business and there is repayment obligation

equity financing activities

raise funds by issuing shares to investors no obligation to repay the money but it dilutes the control over the business

leverage effect (financing activities)

using borrowed funds from banks or bonds to enhance the returns to the shareholders can be good to the business if the business is making more profit than its debt but can be risky if the business is having low income

• purpose(summarize detailed financial data for stakeholders)

• focus(income statements; balance sheet)

• outputs(statements of cash flows)

• users(external users)

recording

• purpose(capture transactions)

• focus (day to day bookkeeping)

• output(trial balance)

• users(account, management; internal )

underlying assumptions

the belief that a business will continue to for see the future without having too cease(liquidate)its operations

accrual accounting (assumption)

you need to record a transaction when it happens now not when money is exchange

expenses

only recorded when used in the business

why are the financial statements important

• they help track the financial performance

• investor use them to check the profitability and the risk before investing

• bank and creditors they use them to check the credibility(ability) of the company to repay the debts

• they are required for legal purposes