Carina Tenaglia ACG 2021 Reading Notes Chapter 1 1 1 Forms of Business Organizations Sole Proprietorship o Simple to set up o Complete control over organization o More favorable tax treatment o Personally liable for all debts legal obligations Partnership o Owned by 2 people o Usually formed b c not enough economic resources individually o Partners bring unique skills resources to the table Usually lawyers doctors offices etc o More favorable tax treatment o Personally liable for all debts legal obligations Corporation o Business organized as a separate legal entity owned by stockholders o More attractive to invest in buy stocks from b c easy to sell shares o Easier to raise funds o Less favorable tax treatment o Not held personally liable for debts legal obligations Hybrid o Most common LLC s Limited Liability Corporation o Subchapter S corporations 1 2 Users and Uses of Financial Information Accounting Info system that identifies records and communicates economic events of an organization to users o Financial External users creditors investors customers regulatory agencies o Managerial Internal users Accounting Across the Organization why they need Accounting o General Management to make wise business decisions overall o Marketing Helps identify profitable sales o Finance Analyze financial statements o Real Estate must understand numbers in transactions involved Ethics in Financial Reporting o Sarbanes Oxley Act SOX passed to reduce unethical corporate behavior decrease likelihood of scandals 1 3 Business Activities Accounting Information System helps keep track of results of business activities Financing Usually funds that help finance kick start business o Primary sources of funds Borrowing debt financing Issuing selling shares of stocks in exchange for cash equity financing o Creditors to whom money is owed They will be paid by company before dividends given to stockholders o Liabilities amount owed to creditors o Note Payable usually note w legal standing stating amount of money owed o Bond Payable debt securities sold to investors to be paid at later date o Common Stock total amount paid by stockholders for shares purchased o Dividends cash payments to stockholders Investing Funds used to purchase resources needed for business to operate o Assets resources owned by business Ex equipment classified as Property Plant Equipment Fixed Assets Cash most important asset o Investing investment activity Operating Activities of making selling product o Revenue increase in assets or decrease in liabilities from sale of goods or performance of service amounts earned on sale Sales Revenue Service Revenue Interest Revenue o Supplies assets used in daily operations o Inventory goods available for future sale to customers o Account Receivable occurs when company has right to receive payment for good s service s in the near future o Expenses cost of assets consumed services used in process of generating revenues Selling Expense ex cost of salesperson s salary ex cost of advertising Marketing Expense Administrative Expense ex cost of staff office expenses Cost of goods sold ex interest amounts paid on debts ex cost of ingredients ex taxes paid to gov t Interest Expense Income Taxes o Accounts Payable Obligations to pay suppliers but usually bought on good credit w them o Interest Payable amount outstanding to be paid to bank or other institution o Wages Payable amount owed to employee s o Other Payables owed to gov t Sales Taxes Property Taxes Income Taxes Revenue Expenses Net Income Revenue Expenses Net Loss 1 4 Communicating With Users Financial Statements Income Statement Retained Earnings RE Statement Function Shows business performance over time period Indicates how much of earnings from previous period was retained for future growth Balance Sheet Statement of Cash Flows Image point in time of assets liabilities To show where cash was obtained used INCOME STATEMENT RETAINED EARNINGS STATEMENT Income Statement Revenue Total Revenues Expenses Total Expenses Net Income Amounts received from issuing stocks are NOT revenues Amounts paid out as dividends are NOT expenses Hint The financial statement heading identifies the company the type of statement and the time period covered Retained Earnings Statement shows amounts causes of changes in RE for specific time period Retained Earnings RE net income retained in the corporation Formula Retained Earnings Beginning Date Add Net Income Less Dividends Retained Earnings End Date Balance Statement reports assets claims to assets specific point in time BALANCE STATEMENT Liabilities Claims of creditors Stockholders Equity Claims of owners o Common stock o Retained Earnings RE Basic Accounting Equation Assets Liabilities Stockholders Equity STATEMENT OF CASH FLOWS Statement of Cash Flows purpose to provide financial info about cash receipts cash payments of a business for a specific period of time o Shows net increase decrease of cash during period amount end of period Answers following questions o Where did the cash come from o How was the cash used o What was changed in the Cash Balance during the period Statement of Cash Flows Formula Operating Activities Cash Flow from Investing Activities Cash Flow from Financing Activities Cash Flow From Sum Net increase decrease in cash Sum Net increase decrease in cash Cash Beginning of Period Cash End of Period Ch 2 Notes 2 1 The Classified Balance Sheet Balance Sheet Groups together similar assets and liabilities using standard classifications and sections Helps determine the following o If company has enough assets to pay debts when they come due o Claims of short long term creditors on a company s total assets Assets Current Assets o A company expects to convert to cash or use these within one year or its operating cycle whichever is longer assume 1 year unless otherwise noted Ex Cash investments short term gov t securities receivables inventories prepaid expenses listed in order of liquidity Long Term Investments o Investments in stocks bonds of other corporations held for 1 year o Long term assets like land buildings that company isn t using currently for operating activities o Long term notes receivable Property Plant Equipment also known as Fixed Plant Assets o Assets with relatively long useful lives that are currently used in operating the business Ex land buildings equipment delivery vehicles furniture o Depreciation the allocation of cost of an asset to a number of years o Accumulated
View Full Document
Unlocking...