Term
| What are the three types of business? |
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Definition
| Service businesses, manufacturing businesses, and merchandising businesses. |
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Term
| What do service businesses provide? Give two examples of service businesses. |
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Definition
| They provide services rather than products. Two examples would be Delta Airlines, which provides a transportation service, and The Walt Disney Company, which provides an entertainment service. |
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Term
| What do merchandising businesses provide? Give two examples of merchandising businesses. |
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Definition
| Merchandising businesses sell products which they purchase from other businesses. Two examples are Walmart, which sells general merchandise, and Amazon.com, which primarily sells books, music, and videos. |
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Term
| What do manufacturing businesses provide? Give two examples of manufacturing businesses. |
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Definition
| Manufacturing businesses change basic inputs into products that are then sold to customers. Two examples would be General Motors Corporation, which manufactures cars, trucks, and vans, and Dell Inc., which manufactures personal computers. |
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Term
| True or false - In accounting, some of the money a business accumulates can be excluded from financial statements if the company wishes not to share it. |
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Definition
| False. In accounting, EVERY dollar must be accounted for. |
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Term
| How much inventory do service businesses and merchandising businesses have? |
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Definition
| Service businesses don't really have inventory and merchandising businesses have lots of inventory. |
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Term
| Name the four forms of businesses. |
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Definition
| Proprietorship, partnership, corporation, and limited liability corporation (LLC) |
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Term
| Which form of business is the easiest to form and which is the hardest? |
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Definition
| Proprietorships are the easiest to form and corporations are the hardest. |
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Term
| What are five considerations that you must make when choosing a form of business to start? |
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Definition
| Ease of formation, ability to raise capital (corporations have highest ability), legal liability (corporations and LLC's have advantage), taxation, and limitation on life. |
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Term
| Describe the ease of formation, legal liability, taxation, capital access, and whether there is limited life for a proprietorship. |
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Definition
| Simple to form, unlimited liability, nontaxable, limited access to capital, and limited life. |
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Term
| Describe the ease of formation, legal liability, taxation, capital access, and whether there is limited life for a partnership. |
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Definition
| Simple to form, unlimited liability, nontaxable, average access to capital, and limited life. |
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Term
| Describe the ease of formation, legal liability, taxation, capital access, and whether there is limited life for a corporation. |
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Definition
| Complex to form, limited liability, taxable, extensive access to capital, and unlimited life. |
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Term
| Describe the ease of formation, legal liability, taxation, capital access, and whether there is limited life for a limited liability corporation (LLC). |
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Definition
| Moderate ease of formation, limited liability, nontaxable, average access to capital, and limited life. |
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Term
| Name and describe the two strategies businesses use to maximize their profits. |
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Definition
| The low cost strategy involves charging the lowest price possible but selling a large volume of products. The premium price strategy involves charging premium prices while selling a lower volume of products because they make more profit off of one sale. |
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Term
| Name and describe the different types of business stakeholders. |
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Definition
| Capital market stakeholders are investors like banks, owners, and stockholders. Product/service market stakeholders are customers and suppliers. Government stakeholders are federal, state, and city governments. Internal stakeholders are employees and managers of the business. |
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Term
| Name the three business activities. |
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Definition
| First is financing, second is investing, and third is operating. |
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Term
| Describe the first business activity (out of 3). |
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Definition
| The first business activity is financing. Financing involves getting outside money. This can be done by borrowing from a third party like a bank (which creates debt) or having stockholders invest in the company (which creates equity). |
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Term
| Describe the second business activity (out of 3). |
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Definition
| The second business activity is investing. Investing involves using assets (cash) to acquire tangible assets (by purchasing machinery, buildings, computers, etc.) or intangible assets (e.g. acquiring patents). |
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Term
| Describe the third business activity (out of 3). |
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Definition
| The third business activity of operating. Operating involves using assets to earn revenues, which results in a net profit. |
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Term
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Definition
| Accounting is an information system that provides reports to stakeholders about the economic activities and condition of a business. |
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Term
| Name the two major objectives of financial accounting. |
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Definition
| The first objective is to report on the balance sheet what a business owns and what it owes others. The second objective is to report on the income statement how the business has done financially by reporting the revenues and expenses. |
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Term
| Name whether these terms are assets, liabilities, or equity - cash, accounts receivable, prepaid expenses. |
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Definition
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Term
| Name whether these terms are assets, liabilities, or equity - accounts payable, bonds payable, interest payable, notes payable. |
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Definition
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Term
| Name whether these terms are assets, liabilities, or equity - capital stock, common stock. |
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Definition
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Term
| Name the four financial statements and briefly describe what they report on. |
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Definition
| Income statement reports on revenue and expenses over a period of time. Statement of retained earnings reports on activity within the retained earnings. Balance sheet reports on what the business owns and what it owes others at a point in time. Statement of cash flows reports on the sources and uses of cash. |
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Term
| Name the equations for the income statement, statement of retained earnings, and balance sheet. |
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Definition
| Income statement: revenue - expenses = net income/loss. Statement of retained earnings: beginning retained earnings +/- net income/loss - dividends = ending retained earnings. Balance sheet: assets = liability + equity (equity = common stock + retained earnings). |
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Term
| What is the accounting equation and on what financial statement does it appear? |
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Definition
| Assets = liabilities + equity. Equity is made up of common stock and retained earnings. This equation appears on the balance sheet. |
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Term
| What are retained earnings? |
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Definition
| Retained earnings are a portion of a corporation's net income that is retained in the business. |
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Term
| What is included in the income statement? What does it report on? What concept does it use? |
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Definition
| The income statement is a summary of the revenue and expenses for a specific period of time. It reports on the change in financial condition due to the operations of a business over a period of time. It uses the matching concept, which states that the revenue minus expenses must equal the net income. |
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Term
| What does the statement of retained earnings report on? |
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Definition
| The statement of retained earnings reports on changes in financial condition due to changes in retained earnings during a period of time. |
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Term
| What are dividends? What financial statement do they appear on? |
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Definition
| Dividends are distributions of profits at a company; it is important to know that they are NOT expenses. They appear on the statement of retained earnings. |
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Term
| What does the balance sheet report on? What is included in the balance sheet? |
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Definition
| The balance sheet reports on the financial condition of a company at a point in time. Assets, liabilities, and equity are included in the balance sheet, making up the accounting equation, assets = liabilities + equity. |
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Term
| What does the statement of cash flows report on? |
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Definition
| The statement of cash flows reports on the change in financial condition due to the changes in cash during a period of time. Specifically, it reports on the 3 business activities (financing, investing, and operating). |
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Term
| In what order are the four financial statements created? |
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Definition
1. Income statement
2. Statement of retained earnings
3. Balance sheet
4. Statement of cash flows |
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Term
| What are the eight accounting "rules" collectively called? |
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Definition
| They are called the Generally Accepted Accounting Principles, abbreviated as GAAP. The four financial statements must be prepared in accordance with these principles. |
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Term
| Name the eight concepts of accounting. |
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Definition
| Business entity concept, cost concept, going concern concept, matching concept, objectivity concept, unit of measure concept, adequate disclosure concept, and accounting period concept. |
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Term
| Describe the Business Entity Concept. |
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Definition
| The Business Entity Concept limits the economic data recorded in a financial statement to the activities of that comapny. In other words, the company is viewed as a separate entity from its owners, creditors, or other companies it may be affiliated with. |
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Term
| Describe the Cost Concept. |
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Definition
| The Cost Concept requires that companies initially record assets at the price at the time of purchase, regardless of its value at a later date. |
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Term
| Describe the Going Concern Concept. |
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Definition
| The Going Concern Concept assumes that a company will continue to stay in business indefinitely. |
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Term
| Describe the Matching Concept. |
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Definition
| The Matching Concept states that expenses must be matched against the revenues they generated. |
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Term
| Describe the Objectivity Concept. |
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Definition
| The Objectivity Concept requires that entries in financial statements are based on verifiable, objective evidence. |
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Term
| Describe the Unit of Measure Concept. |
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Definition
| The Unit of Measure Concept requires that, in the United States, all economic data be recorded in dollars. |
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Term
| Describe the Adequate Disclosure Concept. |
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Definition
| The Adequare Disclosure Concept requires that financial statements contain all the relevant information needed to understand the financial condition and performance of a company. All irrelevent or nonessential data should be left out to avoid clutter. |
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Term
| Describe the Accounting Period Concept. |
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Definition
| The Accounting Period Concept requires that the accounting data be recorded and summarized in financial statements for periods of time. |
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