Chapter 1 Understanding the Business The Players Investors Individuals and groups who provide the initial capital to a business Creditors provide the company with resources but do not own a share of the company Mangers responsible to the owners of the company Financing Activities borrowing additional money or paying back money to its lenders and receive additional funds or pays dividends to owners Investing Activities buying or selling items such as plant and equipment used in producing The Business Operations Operating Activities buying and selling items that are used for primary functions of the company Accounting system that collects and processes financial information about an organization and reports that information to decision makers Internal decision makers managers External decision makers parties outside the firm investors and creditors Balance Sheet purpose is to report the financial position amount of assets liabilities and stockholders equity of an accounting entity at a particular point in time Structure Heading 1 Name of Entity accounting entity the organization for which financial data is to be collected 2 Title of Statement 3 Specific date of Statement 4 Unit of Measure Basic Accounting Equation Assets Liabilities Stockholders Equity Financial Position the economic resources that the company owns and the sources of financing for those resources Assets economic resources owned by the company Liabilities the companies debts or obligations Stockholders Equity indicates the amount of financing provided by owners of the business and earnings Income Statement statement of income statement of earnings statement of operations reports the accountant s primary measure of performance of a business revenues less expenses during the accounting period Net Income Accounting Period The time period covered by the financial statements Revenues Expenses Net Income Revenues Companies earn revenues from the sale of goods or services to customers Reported as they are earned whether or not they have yet been paid for Expenses represents the dollar amount of resources the entity used to earn revenues during the period Recorded when incurred Net Income net earnings the excess of total revenues over total expenses Statement of Retained Earnings reports the way that net income and the distribution of dividends affected the financial position of the company during the accounting period Beginning Retained Earnings Net Income Dividends Ending Retained Earnings Statement of Cash Flows reports inflows and outflows of cash during the accounting period in the categories of operating investing and financing Cash flows from operating activities cash flows that are directly related to earning income Cash provided and used in the normal business operations of the company Cash flows from investing activities cash flows related to the acquisition or sale of the company s productive assets Purchase or sale of long term productive assets the lending of monies to others and the receiving principal payments back from those loans Cash flows from financing activities directly related to the financing of the enterprise itself Borrowing and repaying amounts from financial institutions and the sale or repurchase of the company s stock Relationship among the Statements statement of retained earnings 1 Net Income from the Income Statement results in an increase in ending retained earnings on the 2 Ending retained earnings from the statement of retained earnings is one of the two components of stockholders equity on the balance sheet 3 The change in cash on the cash flow statement added to the beginning of the year balance in cash equals the end of year balance in cash on the balance sheet Notes provide supplemental information about the financial condition of a company without which the financial statements cannot be fully understood 1 Provides descriptions of the accounting rules applied in the company s financial statements 2 Presents additional detail about a line on the financial statement a Details of a long term debt agreement 3 Provides additional financial disclosures about items not listed in the financial statements a A company may lease rather than purchase major pieces of machinery and equipment Generally Accepted Accounting Principles the measurement rules used to develop the information in financial statements Securities and Exchange Commission the U S government agency that determines the financial statements that public companies must provide to stockholders and the measurement rules that they must use in producing those statements Financial Accounting Standards Board the private sector given the primary responsibility to work out the detailed rules that become generally accepted accounting principles Companies incur the cost of preparing the financial statements and bear the following economic consequences 1 Effects on the selling price of stock 2 Effects on the amount of bonuses received by managers and other employees 3 Loss of competitive information to other companies To Ensure the accuracy of the company s financial information management Maintains a system of controls Hires outside independent auditors Forms a board of directors to review these two safeguards Audit involves the examination of the financial reports to ensure that they represent what they claim to and conform with GAAP Public Company Accounting Oversight Board PCAOB the private sector body given the primary responsibility to issue detailed auditing standards Important to have ethics and a good honest reputation and competence Can be sued for malpractice Three Types of Business Entities 1 Sole Proprietorship an unincorporated business owned by one person small common Owner and business are not separate entities Adv Simple to establish Owner Controlled Tax Advantages Dis Limited by own expertise Unlimited liability can lose personal assets 2 Partnership an unincorporated business owned by two or more persons known as partners Not legally separate from its owners Responsible for debts of the business Unlimited Liability Adv Simple to establish Shared Control Broader Skills and resources Tax advantages Dis Unlimited Liability 3 Corporation a business incorporated under the laws of a particular state Owners called stockholders or share holders Ownership represented by shares of capital stock that usually can be bought or sold freely Adv Easier to transfer ownership Easier to raise funds No personal Liability Only responsible for
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