Test Bank For Entrepreneurial Finance - 6th - 2018 All Chapters - 9781305968356
Test Bank For Entrepreneurial Finance - 6th - 2018 All Chapters - 9781305968356
Test Bank For Entrepreneurial Finance - 6th - 2018 All Chapters - 9781305968356
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Finance Summary Semester 1 Laura Frederiks
Chapter 1: Introduction to Accounting
and Business
Nature of business and accounting
A business is an organization in which basic resources, such as materials and labor are
assembled and processed to provide goods or services to customers. The objective of most
businesses is to earn a profit.
Types of businesses
Three types of businesses operated for profit include service, merchandising and
manufacturing businesses.
Service businesses: provide services rather than products to customers. (Like airlines or theme
parks)
Merchandising businesses: sell products they purchase from other businesses to customers.
(like wall-mart and amazon)
Manufacturing businesses: change basic inputs into products that are sold to customers. (Ford
Motor. Co and Dell Inc.)
The role of accounting in business
The role of accounting in business is to provide information for managers to use in operating
the business. In addition, accounting provides information to other users in assessing the
economic performance and condition of the business.
The process by which accounting provides information to users:
1. Identify users
2. Assess users information needs
3. Design the accounting information system to meet users’ needs
4. Record economic data about business activities and events
5. Prepare accounting reports for users
Users of accounting information can be divided into two groups: internal users and external
users.
,Finance Summary Semester 1 Laura Frederiks
Internal users of accounting information include managers and employees. These users are
directly involved in managing and operating the business. The area that provides internal
users with information is called managerial accounting or management accounting.
The objective of managerial accounting is to provide relevant and timely information to
managers’ and employees’ decision-making needs. Managerial accountants employed by a
business are employed in private accounting.
External users of accounting information include investors, creditors, customers and the
government. These users are not directly involved in managing and operating the business.
The area of accounting that provides external users with information is called financial
accounting.
The objective of financial accounting is to provide relevant and timely information for the
decision-making needs of users outside of the business. General-purpose financial statements
are one type of financial accounting report that is distributed to external users.
Role and ethics in accounting and business
The objective of accounting is to provide relevant, timely information for user decision
making. Accountants, managers and employees must behave in an ethical manner, otherwise
no one will be willing to invest in or loan money to the business. Ethics are moral principles
that guide the conduct of individuals.
Sometimes business managers and accountants behave in an unethical manner. What went
wrong in such case?
Failure of individual character: managers and accountants often face pressures from
supervisors to meet company and investor expectations.
Culture of greed and ethical indifference: by their behavior and attitude, senior managers set
the company culture, they can create a culture of greed and indifference to the truth.
Opportunities for accountants
Because all functions within a business use accounting information, experience in private or
public accounting provides a solid foundation for a career.
Generally accepted accounting principles
Financial accountants follow generally accepted accounting principles (GAAP) in preparing
reports. These reports allow investors and other users to compare one company to another.
Accounting principles and concepts develop from research, accepted accounting practices and
pronouncements of regulators.
Business entity concept
The business entity concept limits the economic data in an accounting system to data related
directly to the activities of the business. The business is viewed as an entity separate from its
owners, creditors or other businesses. A business entity may take the form of a proprietorship,
partnership, corporation or limited liability company.
Proprietorship is owned by one individual. - 70% of business entities in the US
- Easy and cheap to organize
- Resources are limited to those of the
owner
,Finance Summary Semester 1 Laura Frederiks
- Used by small businesses
Partnership is owned by two or more - 10% of business organizations in the
individuals US
- Combines the skills and resources of
more than one person
Corporation is organized under state of - Generates 90% of business revenues
federal statues as a separate legal taxable - 20% of the business organizations in
entity the US
- Ownership is divided into shares
called stock
- Can obtain large amounts of
resources by issuing stock
- Used by large businesses
Limited liability company combines the - 10% of business organizations in the
attributes of a partnership and corporation US
- Often used as an alternative to a
partnership
- Has tax and legal liability
advantages for owners
The three types of businesses-service, merchandising. Manufacturing- may be organized as
proprietorships, partnerships, corporations or limited liability companies. Because of the large
amount of resources required to operate a manufacturing business, most manufacturing
businesses and large retailers are corporations.
The cost concept
Under the cost concept, amounts are initially recorded in the accounting records at their cost
or purchase price. The cost concept also involves the objectivity and unit of measure
concepts.
- The objectivity concept requires that the amounts recorded in the accounting records
are based on objective evidence. Both buyer and seller try to get the best price, only
the final price is objective enough to be recorded in the accounting records.
- The unit of measure concept requires that economic data is recorded in dollars.
The accounting equation
- Assets: The resources owned by a business.
The rights or claims to the assets are divided into two types:
- Liabilities: The rights of creditors, the debts of the business.
- Owner’s equity: the rights of the owners.
Assets = Liabilities + Owner’s equity
Liabilities are usually shown before owner’s equity in the accounting equation, because
creditors have first rights to the assets.
, Finance Summary Semester 1 Laura Frederiks
Business transactions and the accounting equation
An economic event or condition that directly changes an entity’s financial condition or its
results of operations is called a business transaction. All business transactions can be stated in
terms of changes in the elements of the accounting equation. How business transactions affect
the accounting equation can be illustrated by using some typical transactions.
Stock issued to owners (stockholders) is referred to as capital stock. The owner’s equity in a
corporation is called stockholders’ equity.
Assume that on November 1, 2011, Chris Clark organizes a corporation that will be known as
NetSolutions.
Transaction A: Nov. 1, 2011 Chris Clark deposited $25,000 in a bank account in
the name of NetSolutions in return for shares of stock in the corporation.
This transaction increases the cash (assets) on the left side of the equation. To balance the
equation the capital stock (stockholders’ equity) on the right increases by the same amount.
Under the business entity concept, Chris Clark’s personal assets are excluded from the
equation, because this overview is only for NetSolutions.
Transaction B: Nov. 5, 2011 NetSolutions paid $20,000 for the purchase of land as
a future building site.
The purchase of the land changes the makeup of the assets, but it does not change the total
assets. The new amounts are called balances.
Transaction C: Nov. 10, 2011 NetSolutions purchased supplies for $1,350 and
agreed to pay the supplier in the near future.
If you pay something with your credit card you received something for a promise to pay your
credit card bill in the future. So you received an asset and incurred a liability to pay the future
bill.
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