ACCT 200 1st Edition Exam 1 Study Guide Lectures 1 9 Chapter 1 The role of Accounting in Business Lecture 1 2 3 Aug 22 27 29 A business is an organization that sells goods or services to customers Their ultimate goal is to make a profit which is the difference between the amounts received from customers for goods or services and the amounts paid for the inputs used to provide the goods or services There are three types of businesses 1 service business provides services to customers does not sell goods ex dry cleaner moving company hairstylist 2 merchandising businessbuys finished goods from manufacturers and sells them to customers acts as a middleman ex WalMart Kroger a mall Amazon 3 manufacturing business busy basic inputs materials labor and overhead from suppliers converts them into finished goods for sale to customers ex Nike Dell Inc Businesses can be more than one type but they must be separated in accounting All types can operate in any of the four business forms 1 sole proprietorship business is owned by one individual easy an inexpensive to organize however the resources are limited the owner is liable for all business debt and owner has to pay for all of the tax on business income 2 partnership owned by more than one individual partners fairly easy and inexpensive to organize and can raise more resources than a proprietorship however there is the possibility of the business growing too large and not being able to issue stock also each partner is legally liable for the actions of the other partners and partners pay tax for their share on business income 3 corporation owned by more than one individual stockholders can usually generate large amounts of stock by selling shares of ownership to the public and there is separate legal entity from owners who are only at risk for the amount they invested however corporations are relatively difficult and expensive to organize and there are two levels of taxation one for the corporation on business income and one for the stockholders on dividends 4 limited liability company LLC owned by more than one individual or entity members NOT a corporation organization if fairly easy and inexpensive and there is separate legal entity from members who are at risk for only the amount they invested however while more resources can be raised than a proprietorship they can face problems of not having enough stock if the business grows too large also members pay their share of tax on business income Businesses generate profit by having high revenues and low expenses Revenue is the amount the business earns during a period that they have done work for Revenue is not necessarily cash received Expenses are the used costs the business incurred during the period they earned revenue in Expense is not necessarily cash paid The net income or net loss is the profit or lack thereof made during the period Net income can be found by the equation Revenues Expenses Net income If expenses exceed revenues then net income will be negative and it is then a net loss There are two different strategies businesses use to gain an advantage over their competitors The low cost emphasis is when a business produces products or services of acceptable quality at a cost lower than its competitors cost With this strategy the business makes a low profit margin on each item but has a high volume of sale ex WalMart grocery stores The premium price emphasis is when a business produces products or services that have unique qualities for which customers are willing to a premium price With this strategy the business makes a high profit margin on each item but has a lower volume of sale ex Fresh Market Lexus Bill Jones Music A business could not run without stakeholders which are entities with an interest in the success of the business There are two types of stakeholders external and internal External stakeholders are outsiders to the business These include Capital Market stakeholders which consist of lenders creditors lend money to the business and want it paid back with interest and owners stockholders invest money in the business and want a return on it dividends Product Service Market stakeholders which consist of suppliers who sell goods or services to the business and customers who buy goods or services from the business and Government stakeholders Federal State Local or Foreign who collect taxes from the business and regulate business activities Internal Stakeholders are people on the inside of the business These consist of business managers and employees who operate the business to earn a profit and keep their job Activities of the business include financing investing and operating Financing is when the business acquires cash to organize and operate Two types of financing are debt financing which is when cash is acquired by borrowing creates an asset something that the company owns in this case cash and an equal liability obligation to repay the borrowed amount and equity financing when cash is acquired by selling pieces of ownership to investors creates an asset and an equal equity stock Investing is when the business uses cash to acquire other assets resources needed to start operating ex building equipment property supplies inventory etc These assets are usually long term assets meaning that they will be used to help generate revenue over longer than one year Operating is when the business engages in day today activities that generate revenues and expenses Accounting is the language of business and is used to 1 evaluate the company s current health and 2 evaluate the company s future prospects Financial accounting gives historical information reports the past to external stakeholders about changes in financial condition during a period use the Income Statement Statement of Retained Earnings and Statement of Cash Flows for this and the financial condition at a single point in time use Balance Sheet for this Managerial accounting gives forward focused information to internal stakeholders so they can make decisions about the future projected financial statements and daily progress reports Financial statements are used to summarize accounts which each give summaries of the effects of business transactions The six account categories are assets liabilities equity revenues expenses and dividends Assets liabilities and equity are found on the balance sheet revenues and expenses are found on the income statement and dividends are found on the statement of retained earnings The