Key Red Definition Dark Blue Learning Objective Royal Blue Equation Chapter 1 Introduction to Financial Statements 1 Describe the primary forms of business organization Sole proprietorship o Simple to establish o Owner controlled o Tax advantages Partnership Corporation o Simple to establish o Shared control o Broader skills and resources o Tax resources o Easier to transfer ownership o Easier to raise funds o No personal liability incorporation in a state of domicile o Advantages A corporation is an incorporated business entity that has filed articled of Can attract large amounts of capital investment Allows for an easy transfer of ownership Can attract professional management Provides stockholders with limited liability Survives the death of its owners continuity of life o Disadvantages Corporations are subject to more government regulations Shareholders can have difficulty knowing whether management is making decisions in shareholders best interests luxuries Corporations are subject to income taxation double taxation 2 Identify the users and uses of accounting information Accounting is the information system that identifies records and communicates the economic events of an organization to interested users Purpose of accounting and in particular financial accounting is to provide economic information as inputs for decision making by users of the information Internal vs external users o Internal marketing management human resources finance work inside of a business being examined employees o External people not employees but use business s financial info to make judgments creditors investors owners stockholders Ethics in financial reporting Sarbanes Oxley o US regulators lawmakers were very concerned that the economy would suffer if investors lost confidence in corporate accounting because of unethical financial reporting o Congress passed Sarbanes Oxley Act of 2002 Key Red Definition Dark Blue Learning Objective Royal Blue Equation o Effective reporting depends on sound ethical behavior o Sarbanes Oxley Act resulted in Top Management must now certify the accuracy of financial information Penalties for fraudulent activity was increased Independence of auditors was increased Increased oversight by the board of directors must occur including the boards selection and supervision of the independent auditor 3 Explain the three principal types of business activity Operating investing and financing activities o Financing activities Two primary sources of outside funds are a Borrowing money debt financing i Amounts owed are called liabilities ii Party whom amounts are owed are creditors iii Notes payable and bonds payable are different types of liabilities b Issuing selling shares of stock for cash i Payment to stockholders are called dividends o Investing activities Purchase of resources a company needs to operate a Computers delivery trucks furniture buildings etc property plant and equipment b Resources owned by a business are called assets c Investments are another example of an investing activity o Operating activities Once a business has the assets it needs it can begin its operations Items commonly affected by operations include a Revenue amounts earned from the sale of products sales revenue service revenue and interest revenue Inventory goods available to customers b c Receivables right to receive money from another party d Expenses cost of assets consumed or services used cost of goods sold selling marketing administrative interest and income taxes expense e Liabilities arising from expenses and represent amounts owed to another party accounts payable interest payable wages payable sales taxes payable and income taxes payable f Net income the excess of revenues over expenses g Net loss the excess of expenses over revenues 4 Describe the content and purpose of each of the financial statements Key Red Definition Dark Blue Learning Objective Royal Blue Equation Income Statement o Rev Expenses Net income Statement of Stockholders Equity summarizes change in equity from beginning of period to end o Beg Equity Owners contributions additional owners NI Dividends Ending equity Balance Sheet o Assets Liabilities Equity Statement of Cash Flows o Cash inflows Cash Flows Net cash flow Key Red Definition Dark Blue Learning Objective Royal Blue Equation Income Statement reports revenues and expenses for a specific period of time o Net Income revenues exceed expenses o Net loss expenses exceed revenues o Past net income proves information for predicting future net income o Retained Earnings Statement shows the amounts and causes of changes in retained earnings during the period o Time period is the same as that covered by the income statement o Users can evaluate dividend payment practices Key Red Definition Dark Blue Learning Objective Royal Blue Equation o 5 Explain the meaning of assets liabilities and stockholders equity and state the basic accounting equation Balance Sheet reports assets and claims to assets at a specific point in time o Assets liabilities SE Basic Accounting Equation o List Assets first followed by liabilities and Stockholders equity Key Red Definition Dark Blue Learning Objective Royal Blue Equation o Statement of Cash Flows o Answers Where did cash come from during the period How was Cash used during the period What was the change in the cash balance during the period Key Red Definition Dark Blue Learning Objective Royal Blue Equation Chapter 2 A Further Look at Financial Statements 1 Identify the sections of a classified balance sheet Presents a snapshot at a point in time A L E To improve understanding companies group similar assets and liabilities together Key Red Definition Dark Blue Learning Objective Royal Blue Equation Current Assets o Assets that a company expects to convert to cash for use up within one year or the operating cycle whichever is longer o Common types Cash short term investments receivables inventories and prepaid expenses unless the company expects any of these Key Red Definition Dark Blue Learning Objective Royal Blue Equation not to be converted to cash or used up in the longer of one year or the operating cycle Operating cycle is the average time it take from the purchase of inventory sell it to customer and collect the cash from customers o Unless noted we will assume that companies operating cycles are shorter than one year Long Term Investments o Investments in stocks and bonds of other corporations that are held for more than one
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