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Chapter 1Forms of Business:- Proprietorship- Generally owned by one person- Simple to establish- Owner controlled- Tax advantages- Partnership- Generally owned by one person- Simple to establish- Owner controlled- Tax advantages- Corporation- Generally owned by one person- Simple to establish- Owner controlled- Tax advantagesBusiness activities:- Financing- Two primary sources of outside funds are: 1. Borrowing money- Amounts owed are called liabilities.- Party to whom amounts are owed are creditors.- Notes payable and bonds payable are different type of liabilities.2. Issuing shares of stock for cash. - Payments to stockholders are called dividends.- Investing- Purchase of resources a company needs in order to operate. Computers, delivery trucks, furniture, buildings, etc. Resources owned by a business are called assets.- Operating- 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 - 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.  Net income – when revenues exceed expenses. Net loss – when expenses exceed revenues.4 Financial Statements:Internal users:- Managers- CFO- CEO- EmployeesExternal Users:- Investors- Creditors- Bankers- Suppliers- Government agencies- IRS- SECComponents of the Annual Report- Financial Statements- Management discussion & analysis:- covers the companies ability to pay near-term obligations, its ability to fund operations and expansion, and its results of operations. - Management must highlight favorable or unfavorable trends and identify significant events and uncertainties that affect these three factors.- Notes- Clarify the financial statements.- Provide additional detail. Notes are essential to understanding a company’s operating performance and financial position.- Auditors Report- Auditor’s opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with generally accepted accounting standards.Chapter 2Classified Balance Sheet:- Presents a snapshot at a point in time.- To improve understanding, companies group similar assets and similar liabilities together.Intangible Assets: assets that do not have physical substance (goodwill, film library, customer lists, cable tv franchises, sports franchises, brands/trademarks)Generally Accepted Accounting Principles (GAAP): A set of rules and practices, having substantial authoritative support, that the accounting profession recognizes as a general guide for financial reporting purposes.Financial Accounting Standards Board (FASB): useful information should possess two fundamental qualities, - relevance – makes a difference. Predictive value/confirmatory- faithful representation – what really happened. Complete, neutral and free from errorComparability results when different companies use the same accounting principles.Information is verifiable if we are able to prove that it is free from error.Information has the quality of understandability if it is presented in a clear and concise fashion.Consistency means that a company uses the same accounting principles and methods from year to year.For accounting information to be relevant, it must be timely.Assumptions in Financial Reporting:- Monetary Unitso Requires that only those things that can be expressed in money are included in the accounting records.- Economic Equityo States that every economic entity can be separately identified and accounted for.- Periodicallyo States that the life of a business can be divided into artificial time periods.- Going Concerno The business will remain in operation for the foreseeable future.- Accrual-Basiso Transactions are recorded in the periods in which the events occur.- Cost principleo Or historical cost principle, dictates that companies record assets at their cost.- Full disclosureo Requires that companies disclose all circumstances and events that would make a difference to financial statement users.Chapter 3Transaction analysis is the same under IFRS and GAAP however different standards sometimes impact how transactions are recorded.ASSETS = LIABILITIES + STOCKHOLDER’S EQUITYChapter 4Adjusting entries- Adjusting entries - needed to ensure that the revenue recognition and expense recognition principles are followed.- Adjusting entries make it possible to report correct amounts on the balance sheet and on the income statement.- A company must make adjusting entries every time it prepares financial statements. - Includes one income statement account and one balance sheet account.- Types of Adjusted Entries:o Deferrals: Prepaid expenses: Expenses paid in cash and recorded as assets before they are used or consumed. Unearned revenues: Cash received and reported as liabilities before revenue is earned. Accruals: Accrued revenues: Revenuesearned but not yet received incash or recorded. Accrued expenses: Expensesincurred but not yet paid in cashor recorded.Accrual vs. Cash- Transactions recorded in the periods in whichthe events occur.- Revenues are recognized when earned, even ifcash was not received. - Expenses are recognized when incurred, even ifcash was not paid.Closing - Rev and expense → income sum- Income sum → retained earnings- Dividends → Retained EarningsSummary of accounting cyclesChapter 5SALES-COGS=GROSS PROFIT – OPERATION EXPENSE= NET INCOMEBEG INVENTORY+PURCHASES=GOODS AVAIL.-END INVENTORY=COGS- Freight costs incurred by the seller are an operating expense Multi-step Income Statement- Highlights the components of net income - Three important line items:o Gross profito Income from operationso Net incomeChapter 6Manufacturing- Raw Materials- Work in Process- Finished GoodsGoods in Transit- Purchased goods not yet received.- Sold goods not yet delivered.Consigned Goods- Goods held for sale by one party althoughownership of the goods is retained byanother party.First-in, first-out (FIFO)Last-in, first-out (LIFO)Average-cost Chapter 7To record collection of note


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LSU ACCT 2000 - Forms of Business

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