Rachel Coe Financial Accounting Chapter 1 Introduction to Financial Statements Forms of Business Organization Sole proprietorship o Simple to establish o Owner controlled o Tax advantages Partnership o Simple to establish o Shared control o Broader skills and resources o Tax advantages Corporation incorporated business o Easier to transfer ownership stocks o Easier to raise funds o No personal liability The owner s money and assets aren t at risk the business itself is This isn t true with proprietorships or partnerships where the owners are at direct risk o Corporations don t die with the owner o Subject to more government regulations o Subject to more taxation double taxation Income taxes based on income Shareholder s must also report dividends as taxable income as well and pay taxes on them proprietorships and partnerships don t get taxed based on income their owners do Accounting the information system that identifies records and communicates the economic events of an organization to interested users Users can be divided into two groups o Internal users Marketing Management Finance Human resources o External users Creditors Users and Uses of Financial Information Ethics in Financial Reporting Investors compare a business s profits to their projected profits or yearly incomes each year OR compare one business s earnings to another in the same industry o US regulators and 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 SOX o Recent scandals include Enron WorldCom HealthSouth AIG o Effective financial reporting depends on sound ethical behavior o SOX Top management must now certify the accuracy of financial infp Penalties for fraudulent activity was increased Independence of auditors was increased Increased oversight by the board of directors must occur including the board s selection and supervision of the independent auditor o Solving an ethical dilemma 1 Recognize an ethical situation and the ethical issues involved situation 2 Identify and analyze the principle elements in the 3 Identify the alternatives and weigh the impact of each alternative on various stakeholders All businesses are involved in three types of activity o Financing Borrowing money debt financing Amount owed are called LIABILITIES Party to whom amounts are owed are CREDITORS NOTES PAYABLE and BONDS PAYABLE are different types of liabilities Issuing selling shares of stock for cash equity financing Payment to stockholders from businesses are called DIVIDENDS o Investing Purchase of resources a company needs to operate Computers delivery trucks furniture buildings etc PPE property plant and equipment Resources owned by a business are called ASSETS Investments are another example of an investing activity Once a business has the assets it needs it can begin its operations Items commonly affected by operations include o Operating Revenues amounts earned from the sale of products sales service interest Inventory goods available for sale to customers Receivables right to receive money from another party accounts receivable are OWED by CUSTOMERS interest receivable is OWED by DEBTORS Expenses cost of assets consumed or services used cost of goods sold selling marketing admin etc Liabilities arising from expenses and represent amounts owed to another party accounts payable interest payable wages payable income taxes payable Net income the excess of revenues over expenses Net loss the excess of expenses over revenues o The accounting information system keeps track of the results of each of these business activities Financial Statements Communicating with users o Companies prepare four financial statements from the summarized accounting data Income statement REVENUES EXPENSES NET INCOME Retained earnings statement or statement of stockholder s equity BEGINNING EQUITY OWNER CONTRIBUTIONS NET INCOME DIVIDENDS ENDING EQUITY Balance sheet ASSETS LIABILITIES EQUITY Statement of cash flows CASH INFLOWS CASH OUTFLOWS NET CASH FLOW negative debt positive profit Other Aspects of an Annual Report US companies that are publicly traded must provide shareholders with an ANNUAL REPORT o 1 Financial statements o 2 Management discussion and analysis MD A Covers the company s ability to pay near term obligations its ability to fund operations and expansion and its results of operations Management must highlight favorable or unfavorable trends and identify significant events and uncertainties that affect these three factors o 3 Notes to the financial statements Clarify the financial statements Provide additional qualitative and or quantitative detail lawsuits or potential lawsuits o 4 Auditor s report Fairness of the presentation of the financial position and results of operations and their conformance with generally accepted accounting principles GAAP a certified public accountant can issue this report Auditors can issue on of four opinions Unqualified Qualified Disclaimer Adverse
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