Slide 1What is a business?What are the basic forms of business organization?Slide 4Slide 5Business ActivitiesBusiness ActivitiesWhat is accounting?Accounting standard-setting in the U.S.International standard-settingObjectives of financial reportingUnderlying assumptionsSlide 13Question 1Question 2Question 3Question 4Self test solutionsFoundations of AccountingWhat is a business?A business is an organization in which resources – such as materials and labor – are processed to provide outputs (goods and services) to customers. Most businesses seek to earn a profit, but some organizations, such as hospitals and churches, are not-for-profit entities.What are the basic forms of business organization?In general, a business can be organized as •a sole proprietorship – with only one owner• a partnership – in which two or more owners combine skills and resource•a corporation – a separate legal entity owned by stockholdersWhat are some of the characteristics of the different forms of business organization?Organizational form Legal status Tax status CharacteristicsSole proprietorship – one ownerLegally, business and owner are considered same entityNon-taxable (pass-through) entity; business profits taxed on owner’s tax return Easy and inexpensive to organize70% of US businesses organized as sole proprietorshipsUnlimited liability of owner; owner is personally responsible for all debts of businessLimited lifePartnership Legally, business and owners are considered same entityNon-taxable (pass-through) entity; partners pay tax on their share of business profitsCombines skills and resources of more than one personUnlimited liability; partners may be personally responsible for debts of businessLimited lifePossibility of disagreement between partners Corporation Business and owners are separate entitiesTaxable entity; corporation files tax return and pays taxes; any distributions to the owners may also be taxed on owners’ individual returnsComplex, may be costly to organizeOrganized under laws of a particular state20% of US businesses, generate 90% of US RevenuesCan obtain resources by issuing stockMore paperwork and regulationLimited liability is major advantage; owners (stockholders) are not personally responsible for business debtsBusiness Activities: Businesses may also be organized according to their business activities, “what” they doService business:provides a service, “does something” Examples: dry cleaner, architect, hair salon, airlineBusiness ActivitiesMerchandising businesspurchases finished goods for re-sale to customersExamples: Target, Amazon, Aggieland OutfittersBusiness ActivitiesManufacturing businessbuys materials, converts them into products for sale either to other manufacturing companies or to customersExample: Goodyear Tire, may sell tires to Ford and GM for use in their new car production, or to tire store for resale to customersWhat is accounting?Accounting is the process of analyzing, organizing, and recording financial information and then communicating that information to decision-makers.Bookkeeping is the recording part of the accounting process.Accounting standard-setting in the U.S.Several organizations influence the development of accounting standards.•Securities and Exchange Commission (SEC)- an agency created by Congress to protect investors by ensuring that all investors have access to high-quality financial information - The SEC has the authority to regulate accounting and reporting practices; however, the SEC generally delegates much of this authority to FASB. •Financial Accounting Standards Board (FASB)- an independent, seven-member organization created by the SEC- a private sector organization responsible for developing accounting standards in the United States- standards may change and evolve as business needs change; FASB seeks input from professional organizations such as AICPA (American Institute of CPAs) and AAA (American Accounting Organization) to keep standards current•Governmental Accounting standards Board- organization responsible for the development of new governmentalaccounting concepts and standardsInternational standard-settingThe International Accounting Standards Board (IASB) is responsible for standard setting outside of the United States. These standards are called International Financial Reporting Standards.Objectives of financial reportingFASB has developed a conceptual framework to help guide in developing accounting principles. These principles are known as GAAP, or generally accepted accounting principles.According to the conceptual framework, financial statements have the objectives of •providing information that is useful in making investment, lending, and similar decisions, •helping assess a business entity’s ability to generate future cash flows, •providing information about a company’s resources and claims on those resources.Underlying assumptions•Entity assumption – each business has an existence separate from its owners, creditors, employees, customers, other interested parties, and other businesses. A separate, identifiable entity is the subject of the statements. •Money measurement – activities are measured in monetary units (U.S. dollars in the United States, euros in Europe…), and only those events which can be expressed in these monetary units are included in the financial statements•Continuity (or going concern) – assumes that an entity will continue to operate indefinitely unless strong evidence exists that the entity will terminate•Cost – assets are generally recorded at their acquisition cost•Time period (or periodicity) – the operations of most businesses are continuous over many years. This assumes that an entity’s life can be subdivided into months or years and that activities can be recorded in these discrete time periods, with financial statements reporting on a specific period or date.Self testUsing the information provided in this presentation, answer the following questions.Solutions are provided on the last slide.Question 1Ethelena is the owner of Ethelena’s Hair Boutique and Salon. Ethelena recently purchased a new car for her personal use, and she took out a personal loan to pay for the car. Ethelena’s accountant indicated that the car could not be included as an asset on the company’s balance sheet. What accounting principle guided this decision?a. cash basis assumptionb.