Accounting Notes CH.1
Accounting Notes CH.1 ACCT 2101
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This 8 page Class Notes was uploaded by Alikhan Ladhani on Tuesday January 19, 2016. The Class Notes belongs to ACCT 2101 at Georgia State University taught by Kris J. Clark in Spring 2016. Since its upload, it has received 179 views.
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Date Created: 01/19/16
ACCT CH1 BOOK NOTES 1/19/16 9:11 PM CH 1.1 FORMS OF BUSINESS ORGANIZATION • Three forms of business • Sole proprietorship, partnership, or corporation. o Sole proprietorship owned by one person § Its Simple to set up § Max control over business § Financing difficult § Transfer of ownership difficult § Personally liable § Ex of some ú barber shops, law offices, and auto repair shops, farms and small retail stores o partnership owned by two or more person § formed because one indvidula does not have enough economic resoures to start or expand business § brings unique skills or resources § partners personally liable § transfer of ownership difficult § Ex of some ú Retail and service-type businesses, including professional practices (lawyers, doctors, architects, and certified public accountants) o Corporation business organized as a separate legal entity owned by stockholders § Investors in a corporation receive shares of stock to indicate their ownership claim § Buying stock in corp. is attractive than investing in partnership cause stocks are easy to sell( transfer owner ship) § Easy for corporations to raise funds § Many businesses start of as sole proprietorships or partnerships and then become a corp. ú Ex of this is Leo Hirshfield started tootsie roll as a sole proprietorship • Taxes and legal liability o Sole proprietorship or partnership receive more favorable tax treatment than corp. (high taxes) o proprietors and partners are personally liable for all debts and legal obligations of the business, corporate stockholders are not o hybrid business § combine the tax advantages of partnerships with the limited liability of corporations § common types are limited liability companies (LLC) and subchapter S corporation • there are 5x more proprietorships and partnerships in the United States than corporations • but corporations bring in 8x more revenue • most of the larege businesses in the US are corporations for ex. Coca - Cola, ExxonMobil, General Motors, Citigroup, and Microsoft • **stock holders are sometimes called shareholders 1/19/16 9:11 PM • CH 1.2 USERS AND USES OF FINANCIAL INFORMATION • provides input for decision making • Accounting identifies, records, and communicates the economic events of an organization to interested users • Users are broken down in to 2 parts: internal and external users • Internal o Internal users are managers who plan, organize, and run a business o include marketing managers, production supervisors, finance directors, and company officers. o questions asked by internal users § finance- is cash sufficient to pay dividends to Microsoft stockholders ? § marketing- what price should apple charge for an ipod to maximize the companys net income? § Human resources- can general motors afford to give its employees pay rases this year? § Management- which pepsico product line is the most profitable? Should any product lines be eliminated? • External users o Investors (owners) use accounting information to make decisions to buy, hold, or sell stock o Creditors such as suppliers and bankers use accounting information to evaluate the risks of selling on credit or lending money o Questions asked by external users § Investors – is GE earning satisfactory income? § Investors – how does Disney compare in size and profitability with time warner? § Creditors – will united airlines be able to pay its debts as they come due • What are the benefits to the company and to the employees of making the financial statements available to all employees? • marketing department will make better decisions about products to offer and prices to charge. • finance department will make better decisions about debt and equity financing and how much to distribute in dividends. • production department will make better decisions about when to buy new equipment and how much inventory to produce. • human resources department will be better able to determine whether employees can be given raises. • all employees will be better informed about the basis on which they are evaluated, which will increase employee morale. • Ethics in financial reporting • Congress passed the Sarbanes-Oxley Act (SOX) to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals. o management must now certify the accuracy of financial information. o penalties for fraudulent financial activity are much more severe. o increased the independence of the outside auditors who review the accuracy of corporate financial statements, and increased the oversight role of boards of directors. • Not- for- profit organization • What benefits does a sound accounting system provide to a not-for- profit organization? o it helps to ensure that money is used in the way that donors intended. o it assures donors that their money is not going to waste and thus increases the likelihood of future donations 1/19/16 9:11 PM • CH 1.3 Business Activities • businesses are involved in three types of activity- financing, investing, operating • financing o main source of funding for corporations § borrowing money (debt financing) § issuing (selling) shares of stock in exchange for cash (equity financing) o persons of entities that company owes money to are its creditors o Amounts owed to creditors—in the form of debt and other obligations—are called liabilities o Different kinds of liabilities § note payable to a bank for the money borrowed § Debt securities sold to investors that must be repaid at a particular date some years in the future are bonds payable. § dividends are cash payments to stockholders are called • Investing activates o involve the purchase of the resources a company needs in order to operate. o Assets are resources owned by a business o Cash is one of the more important assets o Whe comp. has excess cash it may invest in securities (stocks or bonds) of other corporations • Operating activites o Tootsie roll selles candy. The amount earnd on the sale of the product is revenues § Revenue is the increase in assets or decrease in liabilities resulting from the sale of goods or the performance of services in the normal course of business. § so tootsie roll records revenue when it sells a candy product o Sources of revenue common to many businesses are sales revenue, service revenue, and interest revenue. o supplies are assets used in day-to-day operations o inventory Goods available for future sales to customers o account receivable right to receive money in the future o for tootsie roll to sell candy it must purchase sugar, corn syrup, and other ingredients, mix these ingredients, process the mix, and wrap and ship the finished product. It will also accumulate costs like salaries rents, and utilities. These cost are referred to as expenses § expenses are the cost of assets consumed or services used in the process of generating revenues. o Accounts payable purchasing goods on credit from suppliers and having and obligation to pay for these goods o interest payable the outstanding amounts owed to the bank. o wages payable to its employees and sales taxes payable, property taxes payable, and income taxes payable to the government. o Net income revenues exceed expenses o Net loss expenses exceed revenue 1/19/16 9:11 PM • CH 1.4 Communicating With Users • Assets, liabilities, expenses, and revenues are of interest to users of accounting information • arranged in the format of four different financial statements, which form the backbone of financial accounting: o income statement - how successfully your business performed during a period of time, you report its revenues and expenses in an income statement. o retained earnings- indicate how much of previous income was distributed to you and the other owners of your business in the form of dividends, and how much was retained in the business to allow for future growth o balance sheet- present a picture at a point in time of what your business owns (its assets) and what it owes (its liabilities) o statement of cash flow - show where your business obtained cash during a period of time and how that cash was used • income statement • income statements reports a company's revenues and expenses and resulting net income or loss for a period of time • Why are financial statement users interested in net income? Investors are interested in a company's past net income because it provides useful information for predicting future net income. • Amounts received from issuing stock are not revenues, and amounts paid out as dividends are not expenses. As a result, they are not reported on the income statement. • The financial statement heading identifies the company, the type of statement, and the time period covered. Sometimes, another line indicates the unit of measure, e.g., “in thousands” or “in millions.” • Retained earings statemnts • If a company is profitable, at the end of each period it must decide what portion of profits to pay to shareholders in dividends. o It could pay all of its profit to the shareholders or it can retain part of the profits to allow for expansion o Retained earnings is the net income retained in the corporation. • Balance sheet • balance sheet reports assets and claims to assets at a specific point in time • Claims to assets are subdivided into two categories: claims of creditors and claims of owner o claims of creditors are called liabilities o wners' claim to assets is called stockholders' equity • Basic Accounting Equation o ASSETS= LIABILITIES + STOCKHOLDERS EQUITY • “balance sheet” comes from. Assets must balance with the claims to assets. • Liabilities are also referred to as debt. • The heading of a balance sheet must identify the company, the statement, and the date. • Statement of cash flows • statement of cash flows is to provide financial information about the cash receipts and cash payments of a business for a specific period of time. • To help investors, creditors, and others in their analysis of a company's cash position, the statement of cash flows reports the cash effects of a company's operating, investing, and financing activities. • People are interested in the statement of cash flow because they want to know what is happening to a company’s most important resource (cash ) • statement of cash flows provides answers to these simple but important questions: o where did cash come from during the period? o How was cash used during the period? o What was the change in the cash balance during the period?
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