Chapter 1 Introduction to Financial Statements Forms of business organization 1 Sole proprietorship Simple to establish owner controlled tax advantage barber shops law offices auto shops farms retail stores 2 Partnership simple to establish shared control broader skills and recourses tax advantage ex CPA office poss Formed b c individuals does not have enough economic resources to expand Partner brings unique skills recourses 3 Corporation easier to transfer ownership easier to raise funds no personal liability Buying stock in corporation is better b c shares of stock are easy to sell transfer of ownership Individuals can become stockholders by investing in small amounts of money easy for corporations to raise funds Ex Tootsie roll was a proprietorship but in 1919 it incorporated Proprietorship and partnership receive more favorable tax treatment than a corporations BUT they are personally liable for all debts of a business where corporate stockholders are not of proprietorship and partners in US is more than 6x the num of corp however revenue produced by corp is 8x greater Uses and Users of Financial Accounting Accounting is information system that identifies records and communicates the economic events of an organization to interested users Internal users managers who plan organize and run a business o Finance is cash sufficient to pay dividends to Microsoft stockholders o Marketing What price for an ipad will maximize comp Income o HR can we afford to give employees a raise o Management Which PepsiCo product is most profitable and which should be eliminated For internal users accounting provides internal reports such as financial comparison of alternatives projections of income from new sales campaigns and summarized statements Investors owners use accounting info to make decisions to buy hold or sell stock Creditors suppliers and bankers evaluate risks of selling on credit or lending money Business insights provide ex Of business sit from various perspectives ethics investors and Sarbanes Oxley Act SOX so corp must certify financial info so no scandals External Users international Business Activities 2 primary sources of outside funds for corp are borrowing money and issuing selling shares of stock for exchange for cash Financing Activities Person or entities to who comp owes money are its creditors Amounts owed are in the Note Payable is a liability that the comp may have for the money borrowed to purchase Bonds Payable are debt securities sold to investors that must be repaid at a particular form of debt and are liabilities delivery trucks date some time in the future Common stock is total amount paid in by stockholders for the shares they purchase how corp obtain funds In case of financial difficulty creditors claims must be paid before stockholders claims payment schedule Stockholders have no claim to corporate cash until the claims of creditors are satisfied If you buy the stock instead of loaning it money you have no legal right to except ay payment until all of its creditors are paid Payment to stockholders are called dividends Investing Activities Resources owed by a business are called assets Ex property plant equipment and cash If company has excess cash it might choose to invest in securities stocks or bonds of other corp Operating Activities normal course of business Revenue is the increase in assets resulting from the sale of a product or service in the Company can have primary and secondary sources of revenue one coming from the sale of candy products and the other from interest revenue on debt securities held as investments Known as sales service and interest revenue Goods available to future sales to customers are assets called inventory EX Lets say company sells someone something and they do not pay right away The comp assumes that they will be paid soon and this is called account receivable Expenses are the cost of assets consumed or service used Expenses can be cost of goods sold such as cost of ingredients selling expenses such as the cost of salespersons salaries marketing expenses such as cost of advertising administrative expenses such as the salaries of administrative staff and telephone and heat costs incurred at the corporate office interest expense amounts of interest paid on various debts and income taxes corporate taxes paid to government Liabilities may arise from these If the comp purchases goods on credit from supplies that the obligation to pay is accounts payable Also interests payable can be outstanding amounts owed to the bank Also wages payable to employees and sales taxes payable property taxes payable and income taxes payable to the governments Income Statement The income statement reports the success or failure of the comp operations for a period of time the third line sais For the month ended oct It reports the Revenues Expenses and Net income Amounts received from issuing stock are not revenues and the amounts paid out as dividends are not expenses so are not reported on income statement Retained earnings Statement High growth comp often pay no dividends Retained earnings is the net income retained in the corp The Retained earning statements shows the amounts and causes of changes in retained earnings during the period The time period is the same as that covered by the income statement By monitoring this statement users can evaluate dividend payments practices Some investors want comp that have a history of paying high dividends and others that reinvest their earnings to increase the comp growth instead of paying dividends Lenders monitor their corp customers dividend payment because any money paid in dividends reduces a comp ability to repay its debts Balance Sheet The balance sheet reports assets and claims to assets at a specific point in time Claims of assets are subdivided into two categories claims of creditors liabilities and claims of owners stockholders equity Basic accounting equation Assets Liabilities Stockholders Equity thus makes the balance sheet It lists Assets followed by Liabilities and Stockholders Equity SE is comprised of 1 Common stock results when company sells new shares of stock and 2 Retained earnings net income retained in the corporation Creditors analyze a company s balance sheet to determine the likelihood that they will be repaid They also look at the relationship between the debt and stockholders equity to determine whether the company has a satisfactory proportion of debt and common stock financing
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