Accounting 2000Chapter 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.Sole proprietorship -simple to set up-full control-tax advantage-personal liability-difficult to transfer ownership2. Partnership -simple to set up-bring resources/skills -tax advantage-personal liability -difficult to transfer ownership3. Corporation -easy to raise capital-no personal liability-easy to transfer ownership-complex to operate-taxes/double taxationAccounting 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. Internal users Managers, CFO, CEO, employees(Managerial accounting)2. External users Investors, creditors=banks and supplies Govt agencies, IRS, SEC(Financial accounting)Page 1 of 9Accounting 2000Chapter 1 Class NotesEffective financial reporting depends on sound ____ethical behavior___.Recent financial scandals led Congress to the pass the Sarbanes- Oxley Act in 2002.Key Provisions: -top mgmt. must certify accuracy of financial reports-secure penalties for fraud -increased auditor dutiesSteps in Solving an Ethical Dilemma1. recognize an ethical situations and ethical issues involved2. identify and analyze the principal elements in the situation3. identify the alternatives and weigh the impact of shareholdersThree types of business activities and examples of each:Financing Activities: - raise fundsTwo primary sources of outside funds are: 1. ____Borrow Money_______ - Amounts owed are called ____liabilities_____ . - Party to whom amounts are owed are creditors.- Notes payable and bonds payable are different type of liabilities.(traditional loans)2. ____Issue stocks -owners – stockholders/stakeholders- Payments to stockholders are called _dividends___.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 ____assets___. (Can generate future economic benefits)Page 2 of 9Accounting 2000Chapter 1 Class NotesOperating Activities: Once a business has the assets it needs, it can begin its operations.- Revenues - Amounts earned from the sale of products (sales revenue, service revenue, and interest revenue).- Inventory (assets) - Goods available for sale to customers.- Accounts Receivable - Right to receive money from a customer, in the future, as the result of a sale.- Expenses - 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. (Obligations from past transactions/events settled through use of assets/provision of service)- Net Income – when revenues exceed expenses.- Net Loss – when expenses exceed revenuesCompanies prepare 4 financial statements to communicate financial information to users: Name Definition Components DateIncome StatementReports Revenvue & expenses for a period of time Revenues- Expenses = net income (Loss)Time span ( a period of time monthly, quarterly, and yearly)Retained Earnings StatementR/E is the net income retained in the company. Shows the changes in the R/EBeginning R/E+ Net income-DividendsEnd R/E Time spanBalance Sheet Reports assets and claims to assets of aspecific point in time.Assets=Liabilities + stockholders equityDate( last day of the timeperiod)Statement of Cash FlowsShows the resources and uses of cash Sections:1.Operating2.Investing3.Financing Time spanPage 3 of 9Accounting 2000Chapter 1 Class NotesAssets are what we ownLiabilities are what we oweEquity=ownershipIllustration 1-4 net income- you can either keep and invest or pay out dividends (to stockholders)Net income feeds into retained earnings Illustration 1-5Page 4 of 9Accounting 2000Chapter 1 Class NotesIllustration 1-7Common stock and retained earnings are a form of equity. Illustration 1-8Page 5 of 9Accounting 2000Chapter 1 Class NotesComponents of the Annual ReportComponent Definition1. Financial Stats See Previous2. Mgt Discussion and AnalysisMgt discussion of ability to pay debts, fund operations and results of operations3. Notes Clarify the financial stats and give additional detailsAuditors report Auditors opinion as to the fairness of financial statesClass Problems BE1-2BIdentify 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. E2.Trying to determine whether the company can pay its obligations. C3.Trying to determine whether a marketing proposal will be cost effective. B4.Trying to determine whether the company's net income will result in a stock price increase. A5.Trying to determine whether the company should employ debt or equity financing. Da.Investors in common stock.Page 6 of 9Accounting 2000Chapter 1 Class Notesb.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. ISb.Inventories. BS (asset)c.Accounts payable. BS (liability)d.Retained earnings. BS (equity)e.Property, plant, and equipment. BS (Asset)f. Net sales. IS (revenue) = sales revenueg.Cost of goods sold. IS (Expense)h.Common stock. BS (Equity)i. Receivables. BS ( Asset)j. Interest expense. IS P1-3BBPrepare an income statement, retained earnings