ACG2021 Chapter 1 Section 1 Forms of Business Organization Sole proprietorship A business owned by one person Simple to establish o o o Gives you control over the business o o Tax advantages Ex Farms and Small Retail Stores Partnership Corporation A business owned by two or more persons associated as partners o o Often formed because one individual does not have enough economic resources to initiate or expand business Partners bring unique skills or resources to the partnership You and your partners should formalize your duties and contributions in a written partnership agreement Tax advantages o o o o o o A business owned organized as a separate legal entity owned by stockholders also called shareholders Investors in a corporation receive shares of stock to indicate their ownership claim Buying stock in a corporation is often more attractive than investing in a partnership because shares of stick are easy to sell transfer ownership Selling a proprietorship is much more involved Individuals can become stock holders by investing relatively small amounts of money Therefore it is easier for corporations to raise funds The stock is often traded on the New York Stock Exchange NYSE o o Many businesses start as sole proprietorships or partnerships and eventually incorporate o o Example Tootsie Roll started as a sole proprietorship and by 1919 the company had incorporated o No personal liability Taxes and Legal Liability for different organizational forms o If you choose a sole proprietorship or partnership you generally receive more favorable tax treatment than a corporation However proprietors and partners are personally liable for all debts and legal obligations of the business corporate stockholders are not Corporate stockholders generally pay higher taxes but have no personal legal liability Hybrid Forms of Business Statistics on Organizational Types o o o o They combine the tax advantages of partnerships with the limited liability of corporations The most common of these are limited liability companies LLCs and subchapter S corporations The combined number of proprietorships and partnerships in the United States is more than 5 times the number of corporations However the revenue produced by corporations is 8 times greater Chapter 1 Section 2 Users and Uses of Financial Information The purpose of financial information is to provide inputs for decision making Accounting is the information system that identifies records and communicates the economic events of an organization to interested users User of accounting information can be divided broadly into 2 groups internal users and external users Internal Users Internal users of accounting information are managers who plan organize and run a business o These include marketing managers production supervisors finance directors and company officers o Questions asked by internal users Is cash sufficient to pay dividends to Microsoft stockholders What price should Apple charge for an iPod to maximize the company s net income Can General Motors afford to give its employees pay raises this year Which PepsiCo product line is the most profitable Should any product lines be eliminated o Accounting provides internal reports such as financial comparisons of operating activities projections of income from new sales campaigns and forecasts of cash needs for the next year In addition companies present summarized financial information in the form of financial statements o What are the benefits to the company and to the employees of making the financial statements available to all employees If employees can read and use financial reports a company will benefit in the following ways The marketing department will make better decisions about products to offer and prices to charge The finance department will make better decisions about debt and equity financing and how much to distribute in dividends The production department will make better decisions about when to buy new equipment and how much inventory to produce The human resources department will be better able to determine whether employees can be given raises Finally all employees will be better informed about the basis on which they are evaluated which will increase employee morale o o Investors owners use accounting information to make decisions to buy hold or sell stock Creditors such as suppliers and bankers use accounting information to evaluate the risks of selling on credit or lending money o Questions asked by external users Is General Electric earning satisfactory income How does Disney compare in size and profitability with Time Warner Will United Airlines be able to pay its debts as they come due o Taxing authorities such as the Internal Revenue Service IRS want to know whether the company complies with the tax laws External Users o o o o o o o o o o o o How might accounting help you Ethics in Financial Reporting Customers are interested in whether a company like General Motors will continue to honor product warranties and otherwise support its product lines Labor unions such as the Major League Baseball Players Association want to know whether the owners have the ability to pay increased wages and benefits Regulatory agencies such as the Securities and Exchange Commission or the Federal Trade Commission want to know whether the company is operating with the prescribed rules You will need to understand financial reports in any business with which you are associated There is no doubt that a sound well functioning economy depends on accurate and dependable financial reporting Congress passed the Sarbanes Oxley Act SOX to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals Top management must now certify the accuracy of financial information Penalties for fraudulent financial activity are much more severe SOX increased the independence of the outside auditors who review the accuracy of corporate financial statements and increased the oversight of board of directors 1 Recognize an ethical situation and the ethical issues involved Use your personal ethics to identify ethical situations and issues Some businesses and professional organizations provide written codes of ethics for guidance in some business situations 2 Identify and analyze the principal elements in the situation Identify the stakeholders persons or groups who may be harmed or benefited Ask the question What are the responsibilities and obligations of the parties involved 3 Identify the
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