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GSU ACCT 2101 - ACCT Midterm 1 Test Study Guide

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A.Chapter 1a. Identify the advantages of the sole proprietorship, partnership, and corporate form of business organizations.i. Sole proprietorship 1. Simple to establish2. Owner-controlled3. Tax advantagesa. Generally, receive more favorable tax treatment than a corporationii. Partnership 1. Simple to establish 2. Shared control3. Broader skills and resources a. Often formed because one individual does not have enough economic resources to initiate or expand the businessb. Sometimes partners bring unique skills or resources to the partnership 4. Tax advantagesa. Generally, receive more favorable tax treatment than corporations b. Liable for all debts and legal obligations iii. Corporation 1. Easier to transfer ownershipa. Buying stock in a corporation is often more attractive than investing in a partnership because shares of stock are easy to sell (transfer ownership)2. Easier to raise funds a. Individuals can become stockholders by investing relatively small amounts of money, thus making it easier to raise funds3. No personal liability a. Corporate stockholders generally pay higher taxes but have no personal legal liabilityb. Identify internal and external users of financial information.i. Financial information = provides input for decision making; presented in financial statements 1. Internal users = managers who plan, organize, and run a business; accounting provides internal reportslike financial comparisons for operating alternatives, projections of income from new sales campaigns, and the forecast of cash needs for the next yeara. Finance b. Marketingc. Managementd. Human resourcese. Production supervisors f. Company officers 2. External users [QUESTION: where does Taxing authorities, customers, labor unions, and regulatory agencies fall?]a. Investors = uses accounting information to make decisions to buy, hold, or sell stocki. “Company “X” earning satisfactory amount of income?”ii. “How does company “X” compare in size and profitability to company “Y”?”b. Creditors = use accounting information to evaluate the risks of selling on credit or lending money; suppliers and bankers i. “Will they be able to pay their debt when they are due?”c. Identify activities as operating, investing, or financing.i. Financing activities = [QUESTIONS: correct? raising funds] two primary sources of outside funds for corporations:1. Borrowing money (debt financing)2. Issuing (selling) shares of stock for cash (equity financing)ii. Investing activities = involves the purchase of the resources a company needs in order to operate; if the company has excess cash (asset) it may choose to invest in stocks/bonds of other companies iii. Operating = 1. Revenue = the amount earned on the sale of product/ service; increase in assets or decrease in liabilitiesa. Account receivableb. Interest revenuec. Service revenued. Suppliese. inventory2. Expenses = the cost of assets consumed, or servicesused in the process of generating revenues a. Costs of goods soldb. Selling expensesc. Marketing expensesd. Administrative expensese. Interest expensef. Income tax expense d. Calculate components of the income statement, retained earnings statement, and balance sheet and identify the interrelationships.i. Financial Statements = backbone of financial accounting 1. Income Statement = help determine users if the company operations are profitable in a specific timeperiod; Importance: Investors are interested in a company's past net income because it provides useful information for predicting future net income,same with creditors a. Headeri. Company ii. Type of statementiii. Time period covered b. Reportsi. Revenue ii. Expenses iii. Net Income/ Net Loss2. Retained Earnings Statement = shows the amounts and causes of changes in retained earnings for a specific time period; Importance: users can evaluate company's policy toward dividends and growth, Lenders monitor their corporate customers'dividend payments because any money paid in dividends reduces a company's ability to repay its debtsa. Headeri. Company ii. Type of statementiii. Time period covered b. Reportsiv. Retained Earnings [Start Date]v. Add: Net Income/ Net Loss vi. Less: Dividendsvii. Retained Earnings [End Date]3. Balance Sheet = snapshot of assets and claims (to creditors and to owners) from a specific point in time; Importance: users determine if the company relies on debt or stockholders' equity to finance its assets; Use Basic Accounting Equation a. Reportsi. Assetsii. Liabilitiesiii. Stockholder Equityiv. Net income 4. Statement of cash flow = provide financial information about the cash receipts and cash payments of a business for a specific period of time;Importance: helps users determine if the company generates enough cash from operations to fund its investing activitiesa. Answers:i. Where did cash come from during the period?ii. How was cash used during the period?iii. What was the change in the cash balance during the period?b. Header i. Companyii. Type of statementiii. Time period covered ii. Net income/ Net loss = comparison of revenue and expenses e. Define and identify assets, liabilities, and stockholders’ equity accounts and the accounting equation.i. Assets = resources owned by a business1. Cash2. Property, Plant, and Equipment (also known as fixed asset)3. Sales revenue4. Service revenue5. Interest revenue6. Supplies7. Inventory8. Account receivable ii. Liabilities = amount owed to creditors (debt and other obligations)1. Notes Payable2. Bonds Payable3. Accounts Payable4. Interest Payable5. Wages Payable6. Sales Tax Payable7. Property Tax Payable8. Income Tax Payable iii. Stockholders’ equity = owner’s claim to assetsiv. Accounting Equation:Assets = Liabilities + Stockholder’s Equity f. Identify the purpose of the auditor’s report.i. Auditor’s report = a report prepared by an independentoutside auditor stating the auditor’s opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with generally accepted accounting principles (GAAP)B. Chapter 2a. Identify, define, and/or calculate the different sections ofa classified balance sheet.i. Classified Balance Sheet = groups together similar assets and similar liabilities using a number of standardclassifications and sections; Importance: (1) whether the company has enough assets to pay its debts as theycome due, and (2) the claims of short and long-term creditors on the company’s total assets1.

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