Audio Chapter Review In this chapter we introduce some basic information about business We start with the primary forms of business organization A sole proprietorship is a business owned by one person probably like the place where you get your hair cut A partnership is a business owned by two or more people associated as partners such as a law firm or doctors office A corporation is a separate legal entity for which evidence of ownership is provided by shares of stock This is the type you are probably most familiar with like Blockbuster and Walmart Regardless of how a business is organized what matters most is whether it is successful and that comes from making sound business decisions To do that you need accounting information Accounting information is used by both people employed by a business or internal users and those outside the business or external users Internal users are managers who need accounting information to plan organize and run business operations The primary external users are investors and creditors Investors or stockholders use accounting information to help them decide whether to buy hold or sell shares of a company s stock Creditors who mostly consist of suppliers and bankers use accounting information to assess the risk of granting credit or loaning money to a business Other groups who have an indirect interest in a business are taxing authorities customers labor unions and regulatory agencies Okay now that you understand the basics of business organization and the role of accounting information we re ready to talk about what businesses actually do to operate A business has three principle types of business activity Financing investing and operating Financing activities include finding the necessary funds to support the business In other words it takes money to make money Investing activities involve acquiring the resources necessary to run the business Operating activities involve putting the resources of the business into action to generate a profit For a company like Tootsie Roll that means selling candy Can you tell from these activities whether a business is making money Absolutely by reading its financial statements In this chapter we introduce the four principle financial statements which report the results of these business activities An income statement presents the revenues and expenses of a company for a specific period of time A retained earnings statement summarizes changes in retained earnings that have occurred for a specific period of time A third type of financial statement is the balance sheet It reports the assets liabilities and stockholders equity of a business at a specific date It s also a really important statement as it reflects the basic accounting equation The basic accounting equation is assets equals liabilities plus stockholders equity Repeat that equation until you have it totally memorized Assets equals liabilities plus stockholders equity This relationship must hold true in the balance sheet Assets are resources owned by a business Liabilities are the debts and obligations of the business In other words liabilities represent claims of creditors on the assets of the business Stockholders equity represents the claims of owners on the assets of the business Stockholders equity is subdivided into two parts common stock and retained earnings Balance sheet information can make a huge difference in how much money a person can make For example read the ethics insight in this chapter to see how it affects Sheryl Crow s income The fourth financial statement is the statement of cash flows This summarizes information concerning the cash inflows or receipts and outflows or payments for a specific period of time Why is this important Because a company needs a positive cash flow to continue operating To end the chapter we take a look at other financial statements that a typical company prepares For example the management discussion and analysis statement provides management s interpretation of the company s results and financial position as well as a discussion of plans for the future Notes to the financial statements provide additional explanation or detail to make the financial statements more informative The auditors report expresses an opinion as to whether the financial statements present fairly the company s results of operations and financial position