Chapter One compiled by Hamilton Goff from pages 4 23 page s of each major topic is included I Forms of Business organizations pg 4 Sole proprietorship simple to establish tax advantages owner controlled Partnership simple to establish tax advantages shared control Broader skills resources Corporation easier to raise funds no personal liability Easier to transfer ownership II Users of Final Statements pg 6 Internal Users Used by why marketing managers determining a price of a product to maximize a company s net income production supervisors determining which product line is most profitable or finance directors determining if company has enough to pay if any product line would be eliminated company officer determining if a company can afford to give employees dividends to stockholders External users Used by why includes but not limited to a pay raise this year investors determining if they should buy hold or sell their stock creditors determining the risk or selling on credit or lending money Taxing Authorizes determining if company complies with tax laws customers determining if a company continue to maintain itself Labor unions determining if a company have ability to increase wage benefits Regulatory agencies determining if profits were earned legitimately fairly Ethics in Financial Reporting some people think stock prices are rigged financial scandals scare people functional economy depends on accurate DEPENDABLE financial reporting III Business Activities pg 10 Financing Activities raising for business Two ways of Financing borrowing issuing share of stock in exchange for 1 borrowing from creditors a money borrowed note payable b debt securities sold to investors long term debt bonds payable 2 selling share of stock to investors amount of stock sold Common Stock stockholders are paid usually regularly with Dividends DIFFERNCE BETWEEN BOTH Creditors have a set payment schedule ie every 3 months if company cannot pay back they are legally forced to sell properties to pay back creditors Stockholders have no legal right to expect any payments from the company until all of its creditors are paid back As long as company has covered payments to creditors they can pay out dividends to their stockholders Investing Activities using raised in resources needed to operate company 1 Resources owned by a business Assets Assets include but not limited to Cash Plant Properties and Equipment Excess that is Invested in Securities Investments ie of investments other comp s stock or bonds Operating Activities 1 Increase in assets from a sale of a product or a service during operation Revenue ie sales revenue service revenue interest revenue 2 Goods available for future sale to customers Inventory if a customer purchases a good but does not pay immediately with cash then the company has a right to expect future payments Account receivable 3 Costs are assets consumed or services used in the process of generating Expense ie cost of goods sold ei cost of ingredients selling expenses ei cost of salespersons salaries marketing expenses ei cost of advertising administrative expenses ei salaries of administrative staff telephone heat interest expense amount of interest paid on various debts income taxes corporate taxes paid to government costs incurred at the corporate office company may have liabilities arising from these expenses ie Payable Obligation to pay accounts payable obligation to pay for something purchased on credit interest payable interest payments on the outstanding credited amounts wages payable salaries owned to employees sales taxes payable sale taxes owed to government property taxes payable property taxes owed to government income taxes payable income taxes owed to government 4 Profit or not when Revenue exceeds expenses net income profits or Expenses exceeds expenses net loss Rev Exp Rev Exp IV Communicating with Users through use of four types of financial statements pg 12 Balance Sheet shows what business owns assets what it owes liabilities during a period of time Income Statements shows how successful a business performs reports revenues expenses during a period of time Retained Earnings shows how much of previous income was distributed through dividends and how much was retained in the business to allow for future growth Statement of Cash Flow shows where the business obtained cash during a period and how that cash was used V Income Statements reports the success and failure of the company pg 12 results of a Period of time showed by date ei For the Month Ended date lists Revenues followed by expenses then net income NET INCOME Revenue Expenses net income or net loss Shows Should investors buy stock Should banks loan Amounts received from issuing stock is NOT revenue Amounts paid out as dividends are NOT expenses VI Retained Earnings Statement shows amount causes of change in retained earnings period of time same as the income statement s starts with last time period s Retained earnings on first line during a period of time pg 13 Previous Retained Earnings net income or net loss Dividends Retained Earnings RETAINED EARNINGS add net income subtract net loss Shows distribution of dividends to Stockholders kept by company helps evaluate how when the company has paid dividends Lenders monitor their corporate customer s dividends because any paid in dividends reduces the companies ability to repay debts VII Balance Sheet reports assets and claims to assets at a specific time pg 14 Assets ei cash receivables prepaid assets Plant Properties Equip etc to assets Claims ie For Jan 1st 2012 claims of creditors liabilities claims of owners stockholders equity BASIC ACCOUNTING EQUATION Assets Liabilities Stockholders Equity Both Sides must balance always Balance sheet consists of a lists assets first then a list of liabilities stockholders Equity stockholders equity consists of common stock retained Earnings Shows creditors analyze to determine the likelihood that debts will be paid ie can a company s assets be sold to pay a debt managers use it to determine if cash on hand can suffice immediate cash needs to determine if it has a satisfactory proportion of debt Common stock financing VIII Statement of Cash flow provides financial info about cash receipts pg 15 cash payments of a business for a specific Period of time helps investors creditors and others see a companies position reports Operating Investing Financing activities shows net increase or decrease in cash during a period amount of
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