Week 1 Notes
Popular in Introduction To Financial Accounting
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This 4 page Class Notes was uploaded by Anthony Dyer on Tuesday September 6, 2016. The Class Notes belongs to MGA 201 at University at Buffalo taught by Muriel Anderson in Fall 2016. Since its upload, it has received 4 views. For similar materials see Introduction To Financial Accounting in Accounting at University at Buffalo.
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Date Created: 09/06/16
Organizational Forms 08/31/2016 ▯ Sole proprietorship: business organization owned by one person. The owner is personally liable for all debts of the business. ▯ ▯ Partnership: business organization owned by two or more people. Each partner is personally liable for all debts of the business. ▯ ▯ Corporation: A separate entity from both a legal and accounting perspective. Owners of corporations (stockholders) are not personally responsible for debts of the corporation. ▯ ▯ It is easier to sell shares of stock rather than request a loan from a bank. This is something a corporation can do. Companies are not required to distribute dividends. ▯ ▯ The accounting system: ▯ Business and financing activities > Accounting system > accounting reports ▯ Financial (external) ▯ Managerial (internal) ▯ ▯ Assets = Liabilities + stockholders’s equity ▯ ▯ A sole proprietor spends his own money ▯ A corporation only uses corporation assets. ▯ ▯ Separate entity assumption: Requires that a business’s financial reports include only the activities of the business and not those of its stockholders. This means that the owners personal transactions are completely separate. ▯ ▯ ▯ Assets: Resources controlled by the company that have measureable value and are expected to provide future benefits to the company ▯ Cash, suppliers, furniture, equipment ▯ ▯ Liabilities: amounts owed by the business to creditors ▯ Notes payable: more formal, interest involved, in writing, generally long term ▯ Accounts payable: less formal, usually not in writing, between supplier and vendor. Companies purchase on credit, usually 30 days later. No purchase on cash. No interest. ▯ ▯ Stockholders’ equity: owners claim to the business resources ▯ Stockholder’s equity ▯ Common stock: equity paid in by stockholders ▯ Retained earnings: equity earned by the company ▯ Revenues – expenses = net income ▯ ▯ Revenues: sale of goods or services to customer. They are measured at the amount the business charges the customer. ▯ ▯ Expenses: the costs of business necessary to earn revenues, including wages to employees, advertising, insurance, and utilities. ▯ ▯ Dividends: distributions of a company’s earnings to its stockholders as a return on their investment. Dividends are not an expense. ▯ ▯ Organizational forms Sole proprietorship Partnership Corporation Limited Liability Company, LLC (combination between partnership and corporation) ▯ If a corporation wants to raise money, it will sell stock to the public. ▯ Companies will start off as private companies and will become public companies. ▯ ▯ Accounting is to capture information about the operating, investing, and financing activities of a company so that it can be reported to decision makers. ▯ ▯ Managerial accounting reports include detailed financial plans and continually updated reports about the operating performance of the company. INTERNAL ▯ ▯ Financial accounting reports (financial statements) are prepared periodically to provide information to people not employed by the business. EXTERNAL ▯ ▯ Creditors lend money and check financial statements & credit history before lending money on credit. ▯ ▯ Investors are stockholders. Investors use financial statements to determine the financial strength of the business and estimate its value. ▯ ▯ Directors (board of directors) use financial statements to ensure that managers are making decisions in the best interest of the company. ▯ ▯ Government uses financial statements for SEC and IRS. ▯ ▯ The equation ▯ Resources owned = Resourced owed ▯ Assets (of the company) = Liabilities (to creditors) + Stockholder’s equity (to stockholders) ▯ ▯ An asset is an economic resource presently controlled by the company. This can be cash, supplies, equipment, software, and inventory. ▯ ▯ Liabilities are measureable amounts that the company owes to creditors. When a company borrows from a bank, it owes a liability called a note payable. ▯ ▯ Stockholder’s equity is the owner’s claims on the business. The claims arise for two reasons. Common stock. Owners have a claim on amounts they contributed directly to the company in exchange for its stock. Retained earnings. Owners have a claim on amounts the company has earned through profitable business operations. ▯ ▯ Revenue is earned by selling goods or services. ▯ Expenses are all costs of doing business that are necessary to earn revenues. ▯ Net income is revenues minus expenses. ▯ ▯ Financial statements Income statement Statement of retained earnings Balance sheet Statement of cash flows ▯ These are prepared monthly, quarterly, and annually. ▯ Income statement indicates who, what, and when. ▯ ▯ Pg 13
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