Chapter 1 Lecture 2 June 2ndBusiness organizations:1. Sole proprietorshipAdvantage: easy to form Disadvantage: “unlimited liability”Separate entity for accounting purposes (economic entity)NOT a separate entity for tax purposes****2. PartnershipSame as above3. Corporationa. Sell shares of stocks to investorsb. Fully separate entity for both accounting and tax purposesi. Advantage: limited liability, continuity of life (can continue long past thedeath of operator), ease of transfer of ownership, opportunity to raise largecapital through stockii. Disadvantage: double taxationTypes of business activities:1. Financing -how a company pays for growth,expansiona. Borrowing (liabilities)b. Selling ownership (stocks)2. Investing - purchasing resources (assets) to be used in day to day operationsa. Ex: desks, trucks, other office supplies/equipment3. Operating - activities that earn revenue and generate expensesa. Profits )retained earnings - capital)b. NI (net income) = Revenues - Expenses4. Accounting - identify, measure and communicate information about company useful inmaking informed business decisions*** Economic event used to create money portion of hiringDecision maker ← Standardized financial statements^ITransaction occurs/event ---> Accounting recordsA) Balance sheet: shows financial position of the company @ A SINGLE POINT IN TIMEEquation: Assets = Liabilities + stockholders equity1) Assets : resources that will produce a future economic benefit, held by a company2) Liabilities: debts owed to creditors, suppliers, employees, customersa) Ex: supplies granted but not yet paid for, borrowed money, paymentsmade by customer before product received, employee paychecks3) Equity: financing provided by owners and operators of the companya) Common stock - investments made by ownersb) Retained earnings- cumulative earnings of the company that have beenretained (reinvested; not paid out) by the company “what has the companymade since its beginning less what it has paid in dividend”B) Income statement: shows result of the company’s operations for a period of timeEquation: revenues - Expenses = Net income1) Revenues - inflow of assets (cast/ accounts receivable) as result of:a) Performing a serviceb) Delivering a good/product2) Expenses - resources used to generate revenueC) Statement of retained earnings: Shows how net income and dividends cause change ina company's financial position during a period of timeEquation: Beginning retained earnings + net income - dividends = ending retainedearnings● Liabilities: accounts payable (balance sheet)● Assets: accounts receivable, cashm office equipment, supplies (balance sheet)● Expenses: rent expenses, insurance, salary (income statement)● Retained earnings; beginning of year (Income statement) (SRE)D) Statement of cash flows : shows atual change in cash of a company for a period oftimeEquation: Cash flows from operating activities+ Cash flows from operating activities+ Cash flows from financing activities__________________________________Net increase/ decrease+ Cash at beginning of the period__________________________________Cash at the end of the period**** Financial statements linked together in order:● Income statement● Statement of retained earnings● Balance sheet● Statement of cash flowsChapter 2 Lecture 2 June 3rdThe Conceptual FrameworkA. Basic Objective of Financial Reporting: To provide economic information abouta company that is useful in making an “informed decision”.Decision makers are expected to have a reasonable understanding of accountingconcepts.An “Informed Decision” means the investor/creditor/supplier wants to be able toanalyze the financial statements to determine the amounts, timing and uncertainty offuture cash flows.B. Underlying assumptions of accounting help the decision maker to understandwhat accounting information reports as well as inherent limitations.1. Economic entity – business transactions are separate from the personaltransactions of the owners2. Going-Concern – company will continue to operate into the foreseeablefuture without forced liquidation3. Monetary Unit – all information will be measured in its national currency4. Time Period Assumption – The long life of a company can bereported over a series of shorter time periods.5. Cost principle – assets are recorded @ original cost (what we paid forthem)C. In order for the information to be useful (relevant & reliable), it should have thefollowing Qualitative Characteristics (p. 56):1. Understandability – info should be comprehensible to those who arewilling to spend the time to understand it2. Relevance – Information makes a difference in decision making3. Faithful Representation complete, neutral, free from error4. Comparability – between companies; similar methods have beenapplied; “apples to apples; oranges to oranges”; disclosure of whatmethods have been used5. Consistency – between accounting periods within the same company6. Materiality – The $ size of the transaction makes a difference in how it getsrecorded.7. Conservatism – Never want to overstate Assets or Revenues or understateLiabilities or Expenses**** Expensing- Not balance sheet, note made (Pg.56)*** Objectives and qualitative characteristics of financial reporting are not the same for ISAB andFASB ***Financial statement content – the rulesTo understand financial statements, users must understand the measurement rules used toreport them.Generally Accepted Accounting Principles (GAAP) – a common set of “Rules” used toprepare and report financial information in U.S. financial statements.Who makes these rules?A. For U.S. Companies:1. Financial Accounting Standards Board (FASB) – private sector body given responsibility todevelop GAAP.*** responsible for creating rules2. Securities & Exchange Commission (SEC) – federal (government) agency that has broadpowers to prescribe accounting practices and standards to public companies that trade securitieson the major exchanges (NYSE & NASDAQ). The SEC can influence or override any FASBruling.**** Does NOT create rules. Are tasked with regulating the rulesHas the power to override/influence rules/procedures of FASB rulingFederal agencyPowers to prescribe accounting standards/practices*** Do not confuse who is in charge of making rules/procedures and who is in charge ofenforcing/influencing and prescribing them ***3. American Institute of Certified Public Accountants (AICPA) –