ACG 2021 final exam study guide Describe the primary forms of business organization Chapter 1 Introduction to Financial Statements Learning Objectives 1 Sole proprietorship business owned by one person Simple to establish and gives you control Tax advantages If owner dies business terminated Partnership business owned by 2 or more persons associated as partners Bring unique skills or resources to the partnership Formalize duties and contributions in a written partnership agreement Tax advantages Easy to establish If owner dies business terminated Corporation a business organized as a separate legal entity owned by stockholders Investors in a corporation receive shares of stock to indicate their ownership claim Buying stock in a corporation is often more attractive than investing in a partnership bc shares of stock are easy to sell Easier to raise funds No personal legal liability Pay higher taxes 2 levels of taxation Can attract large amounts of capital investment Attract professional management Continuity of life More government regulations Shareholders have hard time knowing whether management is making decisions in shareholders best interest 2 Identify the users and uses of accounting information Internal vs external users Internal users managers who plan organize and run a business Marketing managers production supervisors finance directors company officers human resources Marketing management finance and H R CEO most important External users not employees of business but still use businesses financial info to make informed judgments Investors owners buy hold or sell stock creditors loan money to businesses suppliers and bankers taxing authorities customers labor unions and regulatory agencies Ethics in financial reporting e g Sarbanes Oxley U S regulators and lawmakers were very concerned that the economy would suffer if investors lost confidence in corporate accounting bc of unethical financial reporting Sarbanes Oxley Act passed to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals As a result top management must now certify the accuracy of financial info Penalties for fraudulent financial activity increased more severe Increased the independence of the outside auditors who review the accuracy of corporate financial statements and increased the oversight role of boards of directors 3 Explain the three principal types of business activity Operating investing and financing activities Operating once has assets it needs begin operations Items commonly affected by operations include revenue inventory receivables acct receivable owed by customer expenses liabilities net income net loss Investing purchase of resources a company needs to operate computers delivery trucks furniture buildings etc PPE Assets resources owned by a business Investments are another example of investing activity Financing 2 primary sources of outside funds for corporations are borrowing money debt financing and issuing selling shares of stock in exchange for cash equity financing Loan bonds common stock dividends Describe the content and purpose of each of the financial statements 4 Income statement revenues expenses net income Specific period of time Shows net income or net loss Retained Earnings statement statement of stockholder s equity beginning equity owner contributions net income dividends ending equity Time period same as that covered in income statement Change in equity from beginning of period to the end Balance Sheet assets liabilities equity Retained Earnings statement generates equity What changes equity Investments from different owners net income improves financial standing Specific point in time Statement of Cash Flows cash inflows cash outflows net cash flow Cash in balance sheet must equal cash at the end of the period final input Answers Where did cash come from during period how was cash used what was change in cash balance 5 Explain the meaning of assets liabilities and stockholders equity and state the basic accounting equation above Identify the sections of a classified balance sheet Chapter 2 A Further Look at Financial Statements Learning objectives 1 Assets current assets convert to cash or use up w in 1 year or operating cycle cash investments receivables inventories prepaid expenses long term investments held for more than 1 year long term assets long term notes receivables property plant and equipment long useful lives currently used in operations depreciation accumulated depreciation intangible assets do not have physical substance Liabilities current liabilities w in year or operating cycle whichever is longer acc Payable notes payable current maturities of long term income tax payable etc long term liabilities pay after one year bonds payable mortgages payable long term notes payable lease liabilities pension liabilities Stockholders Equity common stock investments of assets into business by stockholders and retained earnings income retained for use in the business Identify tools for analyzing financial statements and compute ratios for analyzing a company s profitability Earnings per share profitability ratio measures the net income earned on each share of common stock net income preferred dividends average common shares outstanding Explain the relationship between a retained earnings statement and a statement of stockholders equity 2 3 Most companies use statement of stockholder s equity so they can report all changes in stockholder s equity account Shows both retained earnings and common stock 4 Liquidity Working capital Current ratio Identify and compute ratios for analyzing a company s liquidity and solvency using a balance sheet Working capital current assets current liabilities Current ratio current assets current liabilities Debt to assets ratio higher ratio lower solvency total liabilities total assets Ratio means that every dollar of assets was financed by cents of debt Solvency Debt to assets ratio 6 Explain the meaning of generally accepted accounting principles Standard setting e g GAAP SEC FASB IASB IFRS PCAOB GAAP set of rules and standards that are recognized as a general guideline for financial reporting How to account for certain items Standard setting bodies SEC rarely creates GAAP delegates oversees FASB make most of rules IASP created PCAOB IFRS issues standards PCAOB play role in regulation Analyze the effect of business transactions on the basic accounting equation Chapter 3 The Accounting Information
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