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Understanding Financial Statements: Key Vocabulary for Business Entities

This chapter explores essential financial vocabulary necessary for understanding financial statements and business structures. Key terms include accounting concepts such as revenue, expenses, assets, and liabilities, alongside business types like sole proprietorships, partnerships, corporations, and limited liability companies. The discussion also highlights the differences in tax obligations and liability protections among various business entities. Essential financial statements like income statements, statements of retained earnings, and balance sheets are examined to facilitate comprehension of key terms and their practical applications.

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Understanding Financial Statements: Key Vocabulary for Business Entities

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  1. Chapter Onethe financial statements vocabulary words

  2. vocabulary words • Words for which you need to know the definition (word for word or almost word for word) • Words which you need to understand or be able to describe

  3. Definition • Accounting • Revenue • Expense • Assets • Liabilities • Current assets • Current liabilities word for word (or almost)

  4. understand and be able to describe • Financial accounting • Managerial accounting • GAAP • FASB • IFRS • IASB • Sole proprietorship • Partnership • Corporation • Limited liability company

  5. understand and be able to describe • Sole proprietorship • Partnership • Corporation • Limited liability company When discussing how a business is organized there are two questions. Does the business entity pay income tax or does the obligation to pay tax on the entity’s income flow through to the owner(s)? Can the owners’ of the business be held liable for the entity’s liabilities or, are the owners shielded from the entity’s liabilities? When the owners are shielded from the entity’s liabilities, we say the owners enjoy limited liability.

  6. Financial Statements

  7. Miller Motor Co.Income Statementfor the year ending Dec. 31, 2013 Revenue - Expenses +gains -losses Net Income

  8. Miller Motor Co.Statement of Retained Earningsfor the year ending Dec. 31, 2013 Retained earning as of Jan. 1, 2013 + Net income - Dividends (paid to owners) Retained earnings as of Dec. 31, 2013 We use the words Net Income Earnings Profit (net profit) Almost interchangeably

  9. Miller Motor Co.Balance Sheetas of Dec. 31, 2013 Cash Short-term investments Accounts receivable Inventory Prepaid expenses Current assets Land Buildings Equipment Property, plant & equipment Assets Accounts payable Income tax payable Wages payable Current liabilities Notes payable Non current liabilities Common stock Retained earnings Stockholders’ equity Liabilities and stockholders’ equity

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