ACCT207 Study Guide - Fall 2018, Comprehensive Midterm Notes - Income Statement, Financial Statement, Accounts Payable
12 Oct 2018
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Department
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ACCT207
MIDTERM EXAM
STUDY GUIDE
Fall 2018
●The Forms of Business Organization and the Uses of Accounting Information
○Business Organization Forms
■Sole proprietorship
●Simple to establish, owner controlled, tax advantages
●Ex: barber shops, law offices, auto repair shops
■Partnership
●Shared control, broader skills and resources, tax advantages
●Ex: service-type businesses, doctors
■Corporation
●Easier to transfer ownership, easier to raise funds, no personal
liability, two levels of tax (disadvantage)
●Ex: Microsoft, Coca-cola, General Motors
○Users and Uses of financial information
■Internal users
●Finance: Is there a sufficient amount of cash to pay dividends?
●Marketing: What price should Apple charge for an Ipad to
maximize the company’s net income?
●Human resources: Can General Motors afford to give its
employees pay raises this year?
●Management: Which pepsico product line is the most profitable?
■External users
●Investors: Is Apple earning satisfactory income?
●Creditors: Will United Airlines be able to pay its debts?
■Ethics in Financial Reporting
●US regulators/lawmakers were concerned that the economy would
suffer if investors lost confidence in corporate accounting because
of the unethical financial reporting
○Recent financial scandals include Enron, WorldCom, AIG,
HealthSouth, and others
○Congress passed Sarbanes-Oxley Act (SOX)
■Top management must now sign off on statements
■Penalties (jail-time) increased
■Independence of auditors increased
○Effective financial reporting depends on sound ethical
behavior
●Solving the Ethical Dilemma
○Recognize a situation and the ethical issues involved
○Identify/analyze the principle elements in the situation
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find more resources at oneclass.com
○Identify the alternatives; weigh the impact of each
alternative on various stakeholders
●The Three Principal Types of Business Activity
○Financing, Investing, and Operating
■Results of these activities kept track by the accounting information system
■Financing
●Borrowing money (debt)
○Amounts owed are liabilities
○Party to whom amounts are owed are creditors
○Notes payable and bonds payable are different types of
liabilities
●Issuing (selling) shares of stock for cash (equity)
○Common stock is the amount paid by stockholders for
shares they purchase
○Payments to stockholders are dividends
■Investing
●Purchase of resources (assets) a company needs to operate
○Computers, delivery trucks, furniture, buildings
■Operating
●Revenues- amounts earned from the sales of products and other
sources (sales, service, and interest revenue)
●Inventory- goods available for sale to customers
●Accounts Receivable- right to receive money from a customer as
the result of a sale
●Expenses- cost of assets consumed or services used (cost of goods
sold, selling, marketing, administrative, interest, income taxes
expenses)
○Liabilities arising from expenses include accounts payable,
interest payable, wages payable, sales taxes payable, and
income taxes payable
●Net income (revenues > expenses); Net loss (expenses > revenues)
●The Four Financial Statements and How They are Prepared
○Income Statement
■Reports revenues and expenses for a specific period of time
■Net income (revenues > expenses) and Net loss (expenses > revenues)
■Past net income provides information for predicting future net income
■Net income is needed to determining the ending balance in retained
earnings
○Retained Earnings Statement
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
The forms of business organization and the uses of accounting information. Simple to establish, owner controlled, tax advantages. Ex: barber shops, law offices, auto repair shops. Shared control, broader skills and resources, tax advantages. Easier to transfer ownership, easier to raise funds, no personal liability, two levels of tax (disadvantage) Marketing: what price should apple charge for an ipad to. Human resources: can general motors afford to give its. Us regulators/lawmakers were concerned that the economy would suffer if investors lost confidence in corporate accounting because of the unethical financial reporting. Recent financial scandals include enron, worldcom, aig, Top management must now sign off on statements. Effective financial reporting depends on sound ethical behavior. Recognize a situation and the ethical issues involved. Identify/analyze the principle elements in the situation. Identify the alternatives; weigh the impact of each alternative on various stakeholders. The three principal types of business activity. Results of these activities kept track by the accounting information system.
