Accounting 2000 Chapter 1 Class Notes 1 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 6 Describe the components that supplement the financial statements in an the basic accounting equation annual report Forms of business organization Name Definition Advantages Disadvantages 1 Sole proprietorship simple to set up personal liability full control tax advantage difficult to transfer ownership 2 Partnership simple to set up personal liability 3 Corporation bring resources skills tax advantage difficult to transfer ownership easy to raise capital no personal liability easy to transfer ownership complex to operate taxes double taxation Accounting is the information system that identifies records and communicates the economic events of an organization to interested users Users of accounting information two categories examples of each Type Internal users 1 Examples Managers CFO CEO employees 2 External users Managerial accounting Investors creditors banks and supplies Govt agencies IRS SEC Financial accounting Page 1 of 9 Accounting 2000 Chapter 1 Class Notes Effective 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 duties Steps in Solving an Ethical Dilemma 1 recognize an ethical situations and ethical issues involved 2 identify and analyze the principal elements in the situation 3 identify the alternatives and weigh the impact of shareholders Three types of business activities and examples of each Financing Activities raise funds Two 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 9 Accounting 2000 Chapter 1 Class Notes Operating Activities Once a business has the assets it needs it can begin its operations Amounts earned from the sale of products sales revenue Revenues service revenue and interest revenue Inventory assets Goods available for sale to customers Expenses Accounts Receivable Right to receive money from a customer in the future as the result of a sale sold selling marketing administrative interest and income taxes expense cost of assets consumed or services used cost of goods 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 when revenues exceed expenses when expenses exceed revenues Net Income Net Loss Companies prepare 4 financial statements to communicate financial information to users Name Income Statement Definition Reports Revenvue expenses for a period of time Components Revenues Expenses net income Loss Date Time span a period of time monthly quarterly and yearly Retained Earnings Statement Balance Sheet Statement of Cash Flows R E is the net income retained in the company Shows the changes in the R E Reports assets and claims to assets of a specific point in time Shows the resources and uses of cash Time span Beginning R E Net income Dividends End R E Assets Liabilities stockholders equity Date last day of the time period Time span Sections 1 Operating 2 Investing 3 Financing Page 3 of 9 Accounting 2000 Chapter 1 Class Notes Assets are what we own Liabilities are what we owe Equity ownership Illustration 1 4 either keep and invest or pay out dividends to stockholders Net income feeds into retained earnings net income you can Illustration 1 5 Page 4 of 9 Accounting 2000 Chapter 1 Class Notes Illustration 1 7 Common stock and retained earnings are a form of equity Illustration 1 8 Page 5 of 9 Accounting 2000 Chapter 1 Class Notes Components of the Annual Report Component 1 Financial Stats See Previous Definition 2 Mgt Discussion and Analysis 3 Notes Mgt discussion of ability to pay debts fund operations and results of operations Clarify the financial stats and give additional details Auditors report Auditors opinion as to the fairness of financial states Class Problems BE1 2 Identify users of accounting information SO 2 K Match 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 E 2 Trying to determine whether the company can pay its obligations C 3 Trying to determine whether a marketing proposal will be cost effective B 4 Trying to determine whether the company s net income will result in a stock price increase A 5 Trying to determine whether the company should employ debt or equity financing D a Investors in common stock Page 6 of 9 Accounting 2000 Chapter 1 Class Notes b Marketing managers c Creditors d Chief Financial Officer e Internal Revenue Service BE1 6 Determine proper financial statement SO 4 5 K Eskimo Pie Corporation markets a broad range of frozen treats including its famous Eskimo Pie ice cream bars 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 Income tax expense IS Inventories BS asset a b c Accounts payable BS liability d Retained earnings BS equity e Property plant and equipment BS Asset f Net sales IS revenue sales revenue g Cost of goods sold IS Expense h Common stock BS Equity i Receivables BS Asset j Interest expense IS P1 3B Prepare an income statement retained earnings statement and balance sheet discuss results SO 4 5 AP Special Delivery was started on May 1 with an investment of 45 000 cash common stock 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