ACCT 200 Lecture 1 Outline of Last Lecture I Outline of syllabus and class rules Outline of Current Lecture II Forms of Business Organization III Users and Uses of Financial Information IV Business Activities V Communicating with Users Current Lecture Chapter 1 Introduction to Financial Statements Forms of Business Organization Sole Proprietorship Advantages easy to establish owner control taxes Disadvantages Personal liability hard to transfer ownership Partnerships Advantages easy to establish shared control more skills and resources tax Disadvantages Personal liability hard to transfer ownership Corporations Advantages easy to transfer ownership raise lowers legal liability Users and Uses of Financial Information Internal Users Marketing What price should apply charge for an iPod to maximize the company s net income Management Which PepsiCo product line is the most profitable Should any product lines be eliminated Finance Is cash sufficient to pay dividents to Microsoft stockholders Human Resources Can General Motors afford to give its employees pay raises this year External Users Creditors Will United Airlines be able to pay its debts as they come due Investors Is General Electric earning satisfactory income Investors How does Disney compare in size and profitability with Time Warner These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Do It Practice Exercise Identify each of the following organization characteristics with the form or forms with which it is associated 1 Easier to transfer ownership corporations 2 Easier to raise funds corporations 3 More owner control sole proprietorship 4 Tax advantages partnership 5 No personal legal liability corporations Business Activities All business are involved in three types of activity1 Financing money to outside sources 2 Investing purchases needed to operate assets 3 Operating operations Accounting information system keeps track of three major classes of activities Financing Activities Two primary sources of outside funs are 1 Borrowing money debt financing a Liabilities money owed b Creditors who we owe money to c Types of liabilities example Notepay N P Bondpay B P 2 Issuing selling shares of stock for cash a Dividends money payments to stock Investing Activities Purchase of resources a company needs to operate PPE Property plant and equipment o Ex Buildings land computers equipment Assets resources owned by a business to provide future income Investments another example of investing in another company Operating Activities Once a business has the assets it needs it can begin its operations Revenues from sales Inventory available for sale Accounts receivable right to get money payment from a customer Expenses costs of assets or service used Liabilities from expenses promise to pay obligation Net income revenue expense Net loss expenses revenue Do It Practice Problem Classify each item as an asset liability common stock revenue or expense 1 Cost of renting property expense 2 Truck purchased asset 3 Notes payable liability 4 Issuance of ownership shares common stock 5 Amount earned from providing service revenue 6 Amounts owed to suppliers liability Paper expense accounts payable liability Communicating with Users Companies prepare four financial statements from the summarized accounting data 1 IS income statements revenue and expenses 2 SORE statements of returned earnings RE net income dividend 3 B S balance sheet assets liability stockholders equity 4 CF statement of cash flows Review Accounts payable liability b s Accounts receivable asset b s Bond payable liability b s Cash asset b s Common stock SE b s Delivery expense exp i s Dividends Se SORE Equiptment asset b s Income tax expense exp i s Insurance expense exp i s Interest expense exp i s Interest payable liab b s Maintenance expense exp i s Maintenance payable liab b s Office expense liab i s Prepaid insurance asset b s Rent expense exp i s Retained earnings SE SORE b s Revenues rev i s Supplies expense exp i s Supplies on hand asset i s Wages expense exp i s Income Statement Time revenue plus expenses for a period of time Net income rev exp Net loss exp rev Future use for bugets Steps to figure out income statement and retained earnings statement 1 Income statement put in revenue and expenses and get income 2 SORE net imcome is the ending not earnings 3 Balance sheet assets liability stockholders equity a Assets liability stock Net income is needed to determine the end retained earnings Retained Earnings Statement Statement shows changes to RE Time is the same as income statement Users can evaluate the dividend Ending balance in retained earnings is needed for balance sheet Balance Sheet Reports A L SE at a certain point in time assets liability stockholders equity Equation A L SE Order A L SE Cash on balance sheet will match ending cash on the statements of cash flow IS SORE B S CF Statement of Cash Flows Negative numbers are shown in parenthesis Review of Financial Statement Relationships 1 GKG Co1 2 GKG Co2 Liab 90 000 Assets 150 000 SE 230 000 Liab 70 000 Assets SE 1 A L SE A 90k 230K 2 A L SE 150k 70k SE 3 GKG Co3 Cash 10 000 Inv 10 000 A R 25 000 A P 30 000 CS 10 000 RE 3 A L SE CS RE 10k 10k 25k 30k 10k x A 320 000 SE 80 000 Income statement Rev Exp NI Statement of retained earnings Beg RE NI Div End RE Balance sheet A L SE CS RE Rev NI ERE SE 45k 30k 10k x 15k 10k x x 5 000