Forms of business organization:
Name/Definition | Advantages | Disadvantages | 1.Sole Proprietor | Simple to setup & controlTax advantages | Personal liability | 2.Partnership | Simple to establish &share resources Tax advantages | Personal liability | 3.Corporation(Main focus in class) | No personal liabilityEasier to raise capitalEasier to transfer interests | Taxes |
Accounting is the information system that identifies, records, and communicates the economic events of an organization to interested users.
Users of accounting information (two categories & examples of each) Type | Examples | 1.Internal | Managers, Supervisors, Officers | 2.External | Investors, Creditors, Regulators(Government) |
*All use accounting information but have different needs
Effective financial reporting depends on sound ethical behavior.
Recent financial scandals led Congress to the pass the Sarbanes- Oxley Act in 2002.
Key Provisions: * Top management must certify the financial statements * Severe penalties for fraud * Increased auditor duties
Steps in Solving an Ethical Dilemma
1. Recognize the ethical situation & ethical issues involved
2. Identify & analyze the principle elements in the situation
3. Identify the alternatives & weigh the impact on the stakeholders
*Select most ethical alternative
Three types of business activities and examples of each:
Two primary sources of outside funds are: 1. _Borrowing Money * Amounts owed are called ___liabilities _. * Party to whom amounts are owed are creditors. * Notes payable and bonds payable are different types of liabilities.
2. _Issuing shares of stock for cash * Payments to stockholders are called _dividends_.
Purchase of resources a company needs in order to operate. * Computers, delivery trucks, furniture, buildings, etc. * Resources owned by a business are called __assets__. *(Cash, investments, inventory)
Once a business has the assets it needs, it can begin its operations.
* __Revenue___ - Amounts earned from the sale of products (sales revenue, service revenue, and interest revenue). * Inventory - Goods available for sale to customers.
* _Account Receivable__ - Right to receive money from a customer, in the future, as the result of a sale. * _Expenses__- cost of assets consumed or services used. (cost of goods sold, selling, marketing, administrative, interest, and income taxes expense). * Liabilities arising from expenses include accounts payable, interest payable, wages payable, sales taxes payable, and income taxes payable. * __Net Income___– when revenues exceed expenses. * __Net Loss_____ – when expenses exceed revenues
Companies prepare 4 financial statements to communicate financial information to users:
Name | Definition | Components | Date | Income Statement | Reports revenues & expenses for a period of time | Revenue minusExpensesNet Income (Loss) * | Time Span (month, year) | Retained Earnings Statement | R/E is the net income retained in the corporation. Statement shows the in the R/E. | Beginning R/E + Net Income - Dividends= End R/E | Time Span | Balance sheet | Reports assets, liabilities, and stockholders equities at a specific point in time |