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Accounting 2001Chapter 1 Class Notes1. Describe the primary forms of business organization.2. Identify the users and uses of accounting information.3. Explain the three principal types of business activity.4. Describe the content and purpose of each of the financial statements. 5. Explain the meaning of assets, liabilities, and stockholders’ equity, and state the basic accounting equation.6. Describe the components that supplement the financial statements in an annual report.Forms of business organization:Name/Definition Advantages Disadvantages1. Simple to establishControlTax advantages2. Simple to establishBroader skills & resourcesTax advantages 3. Easy to transfer ownershipEasy to raise capitalNo personal liabilityAccounting is the information system that identifies, records, and communicatesthe economic events of an organization to interested users. Users of accounting information (two categories & examples of each)Type Examples1.2.Page 1 of 9Accounting 2001Chapter 1 Class NotesEffective financial reporting depends on sound __________________________.Recent financial scandals led Congress to the pass the Sarbanes- Oxley Act in 2002.Key Provisions: Steps in Solving an Ethical Dilemma1. Recognize an ethical situation and ethical issues involved2. Identify and Analyze the principal elements in the situation3. Identify the alternatives & weigh the impact on the stakeholders Three types of business activities and examples of each:Financing Activities: Two primary sources of outside funds are: 1. __________________________- Amounts owed are called _____________________.- Party to whom amounts are owed are creditors.- Notes payable and bonds payable are different type of liabilities.2. ________________________________- Payments to stockholders are called __________________.Investing Activities: Purchase of resources a company needs in order to operate.- Computers, delivery trucks, furniture, buildings, etc.- Resources owned by a business are called ____________.Page 2 of 9Accounting 2001Chapter 1 Class NotesOperating Activities: Once a business has the assets it needs, it can begin its operations.- ___________________ - Amounts earned from the sale of products (sales revenue, service revenue, and interest revenue).- Inventory - Goods available for sale to customers.- _____________ - Right to receive money from a customer, in the future, as the result of a sale.- _____________- cost of assets consumed or services used. (cost of goods sold, selling, marketing, administrative, interest, and income taxes expense).- Liabilities arising from expenses include accounts payable, interest payable, wages payable, sales taxes payable, and income taxes payable. - ______________– when revenues exceed expenses.- ______________ – when expenses exceed revenuesCompanies prepare 4 financial statements to communicate financial information to users: Name Definition Components DatePage 3 of 9Accounting 2001Chapter 1 Class NotesIllustration 1-4Illustration 1-5Page 4 of 9Accounting 2001Chapter 1 Class NotesIllustration 1-7Illustration 1-8Page 5 of 9Accounting 2001Chapter 1 Class NotesComponents of the Annual ReportComponent Definition1. 2. 3. 4. Page 6 of 9Accounting 2001Chapter 1 Class NotesClass Problems BE1-2@Identify users of accounting information.(SO 2), KMatch each of the following types of evaluation with one of the listed users of accounting information.1.Trying to determine whether the company complied with tax laws.2.Trying to determine whether the company can pay its obligations.3.Trying to determine whether a marketing proposal will be cost effective.4.Trying to determine whether the company's net income will result in a stock price increase.5.Trying to determine whether the company should employ debt or equity financing.a.Investors in common stock.b.Marketing managers.c.Creditors.d.Chief Financial Officer.e.Internal Revenue Service.BE1-6Determine proper financial statement.(SO 4, 5), KEskimo Pie Corporation markets a broad range of frozen treats, including its famous Eskimo Pie ice creambars. The following items were taken from a recent income statement and balance sheet. In each case, identify whether the item would appear on the balance sheet (BS) or income statement (IS). a.Income tax expense.b.Inventories.c.Accounts payable.d.Retained earnings.e.Property, plant, and equipment.f. Net sales.g.Cost of goods sold.h.Common stock.i. Receivables.j. Interest expense.Page 7 of 9Accounting 2001Chapter 1 Class NotesP1-3B@Prepare an income statement, retained earnings statement, and balance sheet; discuss results.(SO 4, 5), APSpecial Delivery was started on May 1 with an investment of $45,000 cash. Following are the assets and liabilities of the company on May 31, 2012, and the revenues and expenses for the month of May, its first month of operations. Accounts receivable $ 6,200 Notes payable $28,000Service revenue 10,400 Salaries and wages expense 2,000Advertising expense800 Equipment 56,000Accounts payable 2,400 Maintenance and repairs expense 2,900Cash 15,800 Insurance expense 400No additional common stock was issued in May, but a dividend of $1,700 in cash was paid.Instructions(a)Prepare an income statement and a retained earnings statement for the month of May and a balance sheet at May 31, 2012.(b)Briefly discuss whether the company's first month of operations was a success.(c)Discuss the company's decision to distribute a dividend.SPECIAL DELIVERYIncome StatementFor the Month Ended May 31, 2012# # # # ## # # # ## # # # ## # # # ## # # # # # ## # # # # # ## # # # # # ## # # # # # #@ # # # # # ## # # # # # ## # # # # # #Page 8 of 9Accounting 2001Chapter 1 Class NotesSPECIAL DELIVERYRetained Earnings StatementFor the Month Ended May 31, 2012@ # # # # # ## # # # # # ## # # # # # ## # # # # # ## # # # # # ## # # # # # #SPECIAL DELIVERYBalance SheetMay 31, 2012Assets# # # # # # ## # # # # # ## # # # # # ## # # # # # ## # # # # # ## # # # # # #Liabilities and Stockholders' Equity@ # # # # # ## # # # # # ## # # # # # ## # # # # # ## # # # # # ## # # # # # ## # # # # # ## # # # # # ## # # # # # ## # # # # # #@ # # # # #@ # # # # #@ # # # #On your own: Do it! Page 18, Comprehensive Do it! Page 23-24Self-Test Questions Pages 25-26Page 9 of


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