Sole Proprietorship
business owned by one person
simple to establish
owner controlled
tax advantages
owner personally liable
financially difficult
Partnership
2 or more owners
simple to establish
shared control
broader skills and resources
tax advantages
personally liable
Corporation
separate legal entity owned by stockholders
easy to transfer ownership
greater capital raising potential
unfavorable tax treatment
lower legal liabilities for owners
Internal Users of Financial Info
Managers
-Finance borrow $ or issue stock?
-Marketing advertising costs
-HR hire or lay off ppl?
-Management expand busi? sell off parts?
External Users of Financial Info
-Investors who should I invest in?
-Creditors should I loan them $?
-Others regulatory agencies, tax authorities, customers, labor
Types of Business Activities - Financing
get large sums of $ from 2 sources:
1. Creditors- borrowing creates liabilities(things the company owes)
2. Owners- selling/issuing stock to shareholders(shareholders equity-how much of a company a stockholder owns)
Types of Business Activities - Investing
obtaining resources or assets(things that have value to the company) to operate a business
e.g. buying and selling land, buildings, equipment, vehicles
Types of Business Activities - Operating
primary activities of business - normal activities the company performs to run their business
e.g. selling goods, providing services, paying employees, advertising, paying utilities
1. Revenues - increase assets resulting from the sale of g&s
2. Expense -
Accounting
info system that identifies, records, and communicates the economic events of an organization to interested users.
uses 4 financial statements
Income Statement
reports operating success or failure for a period of time
summarizes revenues and expenses
Statement of Retained Earnings
income the company has earned over its life and kept in the company (not paid to owners in dividends)
over a period of time
Balance Sheet
reports asses and claims to assets at one point in time
assets- resources owned by the company
=cash, a/r, inventory, investments, furniture, equipment, and supplies
liabilities- obligations or debts of the company
=a/p(verbal promise to pay), n/p(written
Basic Accounting Equation
Assets = Liabilities + Stockholder's Equity
Statement of Cash Flows
Shows where cash came from and where cash went for a period of time
organized by 3 business activities
Annual Report
public companies are required by law to provided audited financial statements and other material once/yr
Includes: 4 financial stmts, Management discussion and analysis-liquidity(ability to pay debt in 1 yr), capital resources(ability to find operations a
Classified Balance Sheet
divides assets and liabilities into current and non-current
helps users see if company has enough assets to pay liabs
Current Assets
assets that are expected to be converted to cash or used up w/in 1 year or one cycle
listed in order of liquidity(how fast converted into cash)
Cash, ST investments, A/R, ST N/R, inventory, supplies, prepaid expenses
Long term investments
investments in stock and bond of other companies which will be held onto for many years
investments in LT assets that we dont use to operate our business
Property, Plant, and Equipment
assets with relatively long useful lives that we use to operate our business
land, buildings, machinery, equipment, vehicles, furniture
Depreciation- allocating the asset's purchase price to the years it will be used instead of expensing the full cost of
Contra Assets
negative assets
Deprec exp stays the same
carrying value= cost-A/D
Intangible Assets
have no physical substance but have value because they give the company exclusive rights or privileges
noncurrent assets
patents, copyright, trademark, franchise
Current Liabilities
obligations that are due within one year or one operating cycle, whichever is longer
A/P, Wages Payable, ST N/P, Interest payable, taxes payable, unearned revenue
Long term Liabilities
debt expected to be paid after 1 year
LT N/P, bonds payable, lease liabilities, employees pension obligations
Stockholder's Equity (Classified B/S)
PIC paid-in-capital
RE
Ratio Analysis
shows relationship among financial statement data (CA vs CL)
ratios by themselves are a little useful, but they are most useful when used in comparison
intracompany-same ratio for same company
intercompany-same ratio for different companies
industry avg-
Profitability Ratios
measures the income or operating success of a company
1. Earnings/share=(NI-perferred stock dividends)/(avg common shares outstanding)
>better
another type of stock in a company
Liquidity Ratios
measures the ST ability of a company to pay current obligations and meet unexpected needs for cash
1. Working Capital=CA-CL
measures ST ability to pay debt
>1 better
2. Current Ratio=CA/CL
measures ST ability to pay debt
>1 better inventory throws this of
Solvency Ratios
measures the ability of the company to survive long into the future (long run success)
1. Debt to total asset ration= Total Liabs/Total Assets
measures the % of assets financed by creditors rather than owners
smaller is better, but still good to have liab
Generally Accepted Accounting Principles (GAAP)
the accounting rules publicly traded companies must follow
Financial Accounting Standards Board (FASB)
Creates GAAP
Securities and Exchange Commission (SEC)
enforces the rules for publicly traded companies
technically in charge of creating GAAP but they delegated it to FASB
Accounting Information
the primary goal of accounting is to provide useful information
Characteristics of Useful Information
1. Relevance- info makes a diff in decisions
-predictive value=helps provide accurate expectations
-confirmatory value=helps confirm correctness of prior expectations
2.Faithful Representation- info accurately depicts what really happened
-Complete and Ne
Enhancing Qualities of Useful Info
1. Comparability
2. Consistency
3. Verifiable
4. Timely
5. Understandability
Accounting Assumptions
1. monetary units- expressed in terms of money
2. economic entity- every entity can be separately identified and corporations and separate entities than the owners
3. periodicity-artificial time periods
4.going concern-continue operating into foreseeable
Accounting Principles
1.cost-records assets at cost, not their true market value
2.fair value principle-records assets and liabs at fair value
3.full disclosure- disclose all info that may affect a financial statement user's decision
Constraints in Accounting
1.Materiality- companies do not have to follow GAAP for a small amounts that would not affect user's decision
2.Cost-Benefit-benefit of providing info should outweigh the cost to gather info
3.Conservation-when in doubt, choose the option that will be lea
Accounting Info System
the system of collecting and processing transactional data and communicating financial info to decision makers
Transaction Analysis
the process of identifying the specific effects of economic events on the accounting equation
Each transaction has a dual effect on the accounting equation
Logic of Transaction Analysis
What happen?
What accounting things were affected?
Did the increase/decrease?
Accounts
an individual accounting record of increases and decreases in a specific asset, liab, or SE item
e.g. cash, supplies, A/P,RE
accounts increase/decrease by debiting/crediting them
if debits>credits---said to have a "debit balance
T Account
Three Parts:
1. the title
2. left side--debit
3. right side--credit
--whichever side you increase is the "normal balance
Journal Entries
we keep track of accounting info for our accounts by first recording it in entries
Debits=credits
Basic Steps in Recording Process
1. analyze transaction-what happened? what accounts were affected? did they increase or decrease?
2. journalize transactions-make the journal entry in the "General Journal"(accounting record where journal entries are listed in chronological order)
3. post
Chart of Accounts
a list of a company's accounts (numbered)
Trial Balance
a list of all our accounts and their debit or credit balance
shows debit=credit
aids in preparation of F/S