Chapter 1 - Business Decisions and Financial AccountingOrganizational Forms -Sole Proprietorship: owned by one person; owner is personally liable for all debts of the business-Partnership: owned by two or more people; each partner is liable for all debts-Corporation: corporation is legally responsible for its own taxes & debts. Owners (stockholders) cannot lose more than their investmentThe Accounting System -a system of analyzing, recording, and summarizing the results of a business’s activities; then report the results to decision makers•private accountant: hire to work as an employee for the business•public accountant: provide advice to a variety of businesses-Creditors: anyone who the company owed money to•Banks & Suppliers-Investors•StockholdersThe Basic Accounting Equation -Assets: resources owned/controlled by the company; have measurable value & are expected to provide future benefits by producing cash inflows (supplies, inventory, equipment…)-Liabilities: amounts owed by the business to creditors-Notes Payable — bank (formal, longterm, w/ interest)-Accounts Payable — suppliers (inform, short-term, due in 30 days)-Wages Payable — employees’ wages-Taxes Payable — taxes to government-Stockholders’ Equity: owners’ claim on business-Contributed Capital — paid in by stockholders -Retained Earnings — earned/profit by the company-Revenues: earned by selling g/s to customers-Expenses: all costs of business necessary to earn revenues1Resources Owned . . . by the company Resources Owed . . . to creditors to stockholders Assets = Liabilities + Stockholders’ Equity Business and Financing Activities Accounting System Accounting Reports External users (creditors, investors, etc.) Internal users (managers, etc.) CREDITORS > STOCKHOLDERSLiabilities must be paid before paying to stockholders.Revenues – Expenses = Net Income -Dividends: distribution of company’s earning to its stockholders as a return on their investment-DIVIDENDS ARE NOT AN EXPENSE!Financial Statements -typically prepared in this order:1. Income Statement: reports the amount of revenues minus expenses for a period of time (Revenue - Expense = Net Income)-Unit of measure assumption: reports appropriate monetary unit according to your own country-Net Income = how much better off your business is, not how much cash you made2. Statement of Retained Earnings: reports how net income & distribution of dividends affect the financial position of the company during the period3. Balance Sheet: reports at a specific point in time — assets (what a business owns), liabilities (what it owes to creditors), stockholders’ equity (what is left over for the owners of the company’s stock)4. Statement of Cash Flows: summarizes how a business’s operating, investing, and financial activities caused its cash balance to change over a particular period of time-Operating: directly related to earn profit(supplies, ads, insurance, rent…)-Investing: related to sale/purchase of productive assets(buildings, land, equipment, tools…)-Financial: involving investors & banks(borrow & repay to banks, contribution from stockholders, paying dividends)2PIZZA AROMA, INC. Income Statement For the Month Ended September 30, 2013 Revenues Pizza Revenue Total Revenue Expenses Supplies Expense Wages Expense Rent Expense Utilities Expense Insurance Expense Advertising Expense Income Tax Expense Total Expenses Net Income $ 12,000 12,000 5,000 2,000 1,500 600 300 100 500 10,000 $ 2,000 PIZZA AROMA, INC. Statement of Retained Earnings For the Month Ended September 30, 2013 Retained Earnings, Sept. 1, 2013 Add: Net Income Subtract: Dividends Retained Earnings, Sept. 30, 2013 $ 0 2,000 (1,000) $ 1,000 PIZZA AROMA, INC. Balance Sheet At September 30, 2013 Assets Cash Accounts Receivable Supplies Equipment Total Assets Liabilities Accounts Payable Notes Payable Total Liabilities Stockholders’ Equity Contributed Capital Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity $ 14,000 1,000 3,000 40,000 $ 58,000 $ 7,000 20,000 27,000 30,000 1,000 31,000 $ 58,000 PIZZA AROMA, INC. Statement of Cash Flows For the Month Ended September 30, 2013 Cash Flows from Operating Activities Cash received from customers Cash paid to employees and suppliers Cash Provided by Operating Activities Cash Flows from Investing Activities Cash used to buy equipment Cash Used in Investing Activities Cash Flows from Financing Activities Capital contributed by stockholders Cash dividends paid to stockholders Cash borrowed from the bank Cash Provided by Financing Activities Change in Cash Beginning Cash Balance, Sept. 1, 2013 Ending Cash Balance, Sept. 30, 2013 $ 11,000 (6,000) 5,000 (40,000) (40,000) 30,000 (1,000) 20,000 49,000 14,000 - $ 14,000 “Provided by” — inflow > outflow “Used in” — inflow <