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Prelim 1_StudyGuide


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F INANCIAL A CCOUNTING P RELIM 1 B USINESS O PERATIONS Owner Managers : founders of the business who also function as managers Lender : or creditor, lends money to an entity in hopes of gaining on interest payments Investors : invest in a company, in hopes of earning gains in one of two ways: 1. Dividends : a portion of what the company earns in the form of cash payments 2. Capital Gains : selling the stock at a higher price than bought T HE A CCOUNTING S YSTEM : collects + reports financial info to decision makers Managerial Accounting : developing detailed plans and continuous performance reports for internal decision makers managers Financial Accounting : periodic financial statements and related disclosures, prepared for external decision makers investors, creditors, suppliers, customers T HE F OUR B ASIC F INANCIAL S TATEMENTS : summarize financial activities of the business, can be prepared at any point in time (end of the year, quarter, month) INCOME STATEMENT RETAINED EARNINGS BALANCE SHEET CASH FLOWS THE BALANCE SHEET : reports the financial position of an accounting entity at a particular point in time, a snapshot Assets : economic resources owned by the entity as a result of past transactions, listed by their ease conversion to cash (their liquidity) o Current Assets : resources that will be used or turned into cash within 1 year, inventory will always be a current asset no matter what Accounts receivable, Cash, Supplies, Prepaid Expenses, Other Current Assets o Long Term Assets : resources owned by a company to be used over 3 years Long-Term Investments, Property and Equipment, Long Term Notes Receivable Intangible Assets: have no physical existence yet have a long life: patents, trademarks, copyrights, franchises that are used in a way similar to the depreciation of tangible assets They are reported net of accumulated amortization on the balance sheet Liabilities : debts or obligations from past transactions, listed by maturity o Current Liabilities : those obligations needing to be paid within 1 year Accounts Payable, accrued expense o Long Term Liabilities : Unearned Franchise Fees, Long-Term Notes Payable, Other Long-Term Liabilities Stockholders’ Equity : financing provided by owners of the business and earnings o Contributed Capital : the investment of cash and other assets in the business by the owners, shown in two accounts: Common Stock : when a corporation issues capital stock, the amount received is recorded in part as common stock 1
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Number of Shares X Par Value per Share o Each share of common stock usually has a low par value (the legal amount per share established by the board of directors) printed on the face of the certificate Additional Paid-in Capital/Contributed Capital in Excess of Par : the excess above par o Retained Earnings : company earnings (profits) that are not distributed to the owners as dividends and are instead reinvested in the business Assets = Liabilities + Stockholders’ Equity THE INCOME STATEMENT
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