ACG2021 Patterson Exam 1 Study Guide Chapter 1 3 primary types of business organization Sole Proprietorship Simple to set up and gives single owner control over business Tax advantages Personally liable for all debts and legal obligations Ex Usually small businesses are sole proprietorships such as repair shops barber shops lawn mowing etc Partnership Corporation Also simple to establish Ownership by two or more persons Often formed to help produce economic funding to initiate the business Broader skills with working with a partner Personally liable for all debts and legal obligations Ex Retail or service businesses or professional practices like doctors lawyers CPA s etc Organized as a separate entity owned by stockholders who are investors in the company and receive shares of stock to declare their ownership Ownership can be transferred easily through shares of stock Easier to sell shares to stockholders in stock exchanges because corporations are widely known and attractive compared to proprietorships and partnerships Cons More government regulations Pay higher taxes but have limited liability Subject to double taxation income tax Accounting Information system that identifies records and communicates the economic events of an organization to interested users Internal Users Managers who plan organize and run the business Includes marketing managers production supervisors finance directors etc Accounting provides internal users with economic information on the company in the form of financial statements that help project incomes and funds needed to continue operation External Users Investors owners Use accounting information to decide to buy hold or sell stock of a business Creditors Usually suppliers or bankers Use accounting information to evaluate and report the risks of selling on credit or lending money to a company Ex Tax authorities concerned with a company s compliance with tax laws customers concerned if a company will honor product warranties and support its product labor unions concerned with making sure increased wages and benefits are provided regulatory agencies are concerned with making sure that profits are being recorded by legitimate and fair practices Sarbanes Oxley Act SOX U S became concerned that economy could tank if investors and customers lost trust in Reduce unethical corporate behavior scandals major corporations accounting due to scandals in unethical financial reporting Passed this act in order to Make the top management certify that financial statements are accurate Penalties for fraudulent financial activity Increase independence of outside auditors who review the accuracy of a corporations financials and provide their certified opinion to a board of directors 3 forms of business activities Financing Activities Investing Activities Operating Activities Financing activities Two primary sources to produce funds Borrowing money Debt financing Result in liabilities that are amounts owed from the company to creditors Liabilities may include a note payable borrowing from a bank or bonds payable sold to investors that must be repaid at a particular date Issuing selling shares of stock in exchange for cash stockholder equity financing Payments in the financial statements to the stockholders are subtracted and called Common stock the total amount paid by stockholders for the shares they purchased dividends Investing Activities Using cash raised from financing activities in order to invest in purchasing resources that the company needs to operate Ex Resources can range from delivery trucks computers buildings etc Assets resources owned by a business Property plant equipment Cash is the most important asset Investments in securities stocks or bonds in other corporations Operating Activities Using assets achieved through financing investing activities to begin operation Revenues amounts earned on a sale of product Increase in assets and decrease in liabilities Include sales revenue service revenue and interest revenue from investing in other debt securities Inventory goods available for future sales are considered assets Receivables right to receive money from another party expected to receive in near future ex accounts receivables owed by customers or interest receivable owed by debtors Costs of assets consumed or services used Ex cost of goods sold ingredients selling expenses to salespersons salaries marketing expense advertising costs administrative expenses salaries of staff costs of corporate office interest expense amounts of interest paid to various debts income tax expenses Expenses Liabilities Amounts owed to creditors that the corporation has an obligation to pay recorded as an accounts payable Often recorded with term payable Ex interest payable owed to banks wages payable owed to employees sales tax payable property taxes payable and income taxes payable owed to the government Compare revenues and expenses to determine if the company earned a profit Net income when revenues exceed expenses Net loss when expenses exceed revenues Financial Statements in order 1 Income statement To show how successful the business performed during a period of time Report revenues and expenses to calculate net income Revenues Expenses Net Income Formatted as the following Heading identifies company name first type of financial statement and the period of time being reviewed followed by revenues first then subtracted expenses and finally calculates the net income for the period Retained Earnings Statement Simply indicates how much of the previous income shown in the income statement has been distributed to the owners of the business stockholders in dividends then how much is retained earnings left for future growth To calculate Note the retained earnings as of the beginning of the period Add net income from income statement Subtract dividends Calculate the retained earnings ending balance for the end of the time period noted on the heading identical to the income statement Balance Sheet Snapshot of a point in time of what your business owns assets and what it owes liabilities Assets Liabilities Stockholder s Equity Lists assets first then liabilities and stockholder s equity Note in the heading of the balance sheet is a specific date rather than period Statement of Cash Flows Purpose is to show financial information on cash receipts and cash payments for a period of time Reports all of the company s operating investing and financing activities Negative numbers are
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