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acct ch 01
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Chapter 1AN INTRODUCTION TO FINANCIAL STATMENTS
ACCT 252 Study Plan Suggestions
Forms of Business Organization
Sole proprietorship
Partnership
Corporation
Sole ProprietorshipBusiness owned by one personSimple to establishOwner controlledTax advantagesOwner personally liableFinancing difficult
PartnershipTwo or more ownersSimple to establishShared controlBroader skills & resourcesTax advantagesPersonal liability
CorporationSeparate legal entity owned by stockholdersEasy to transfer ownershipGreater capital raising potentialLower legal liabilityUnfavorable tax treatment
BE1-1 Identify each as sole proprietorship (SP); partnership (P), or corporation (c)(a) Shared control, tax advantages, increased skills and resources(b) Simple to set up and maintains control with founder(c) Easier to transfer ownership and raise funds; no personal liability
BE1-2 Who does the following? Investors in common stock.Marketing managers.CreditorsChief financial officerInternal revenue service1. Sees if company complied with tax laws.2. Sees if company can pay its obligations.3. Sees whether a marketing proposal will be cost effective.
Users of Financial InformationInternalManagers who plan, organize and run a businessMarketing managersProduction supervisorsFinance directorsCompany officers
Users of Financial InformationInternal Users Ask?
Users of Financial InformationExternal
InvestorsCreditorsOthersRegulatory agenciesTax authoritiesCustomersLabor UnionsEconomic planners
Users of Financial InformationExternal Users Ask?
BE1-2 Who does the following? Investors in common stock.Marketing managers.CreditorsChief financial officerInternal revenue service4. Sees whether companys net income will result in stock price increase5. See if company should employ debt or equity financing
Types of Business ActivityFinancing
Investing
Operating
Financing ActivitiesBorrowing creates liabilitiesBank loansDebt securitiesGoods on credit or payables
Selling stock creates stockholders equity
Investing ActivitiesObtaining resources or assets to operate the businessLandBuildingsVehiclesComputersFurnitureEquipment
Operating ActivitiesPrimary activity of businessSelling goodsProviding servicesManufacturingCost of SalesAdvertisingPaying employeesPaying utilities
Operating ActivitiesRevenues are the increases in assets resulting from the sale of a product or serviceExpenses are the cost of assets consumed or services used in generating revenue.If revenue > expense = Net IncomeIf revenue < expense = Net Loss!
Review Question 1Which is not one of the three forms of business organization?a. Sole proprietorship.d. Corporation.c. Partnership.b. Creditorship.
ReviewWhich is not one of the three forms of business organization?a. Sole proprietorship.d. Corporation.c. Partnership.b. Creditorship.
Review Question 2Which is an advantage of corporations relative to partnerships and sole proprietorships?a. Lower taxes.d. Most common form of business organization.c. Reduced legal liability for investors.b. Harder to transfer ownership
ReviewWhich is an advantage of corporations relative to partnerships and sole proprietorships?a. Lower taxes.d. Most common form of business organization.c. Reduced legal liability for investors.b. Harder to transfer ownership
Review Question 3Which is not one of the three primary business activities?a. Financing.d. Investing.c. Advertising.b. Operating.
ReviewWhich is not one of the three primary business activities?a. Financing.d. Investing.c. Advertising.b. Operating.
BE1-3 Identify if item is an operating (O), investing (I), or financing (F) activity on cash flow statement.A. Cash received from customersB. Cash paid to stockholders as dividendsC. Cash received from issuing new common stockD. Cash paid to suppliersE. Cash paid to purchase a new office building.
Content and Purpose of Financial StatementsAccountants communicate with users through four financial statements
Four Financial StatementsIncome StatementRetained Earnings StatementBalance SheetStatement of Cash Flows
Income StatementReports operating success or failure for a period.Summarizes revenues and expenses for period: month, quarter, year.If revenue > expense = Net Income.
Income StatementDo this statement first!
Retained Earnings StatementShows changes in retained earnings for period: month, quarter, yearBeginning balanceAdd Net Income from income statement.Deduct DividendsEnding balance
Retained Earnings StatementDo this statement second!
Balance SheetReports assets and claims to assets.Claims of creditors, liabilities.Claims of owners, stockholders equity.Assets = Liabilities + Stockholders EquitySpecific date one point in time!
Balance SheetFrom Retained Earnings Statement
Statement of Cash FlowsProvides information about cash receipts and cash paymentsSummarizes for period: month, quarter, year.Cash effects of operating, investing, and financing activities.
Statement of Cash FlowsWhere did the cash come from?How was cash used during the period?What was the change in the cash balance during the period?A company cannot survive without cash!
Statement of Cash Flows..Agrees with Balance Sheet
AssetsResources owned by the businessCashAccounts receivableInventoriesFurniture and fixturesEquipmentSupplies
LiabilitiesObligations or debts of businessNotes payableAccounts payableInterest payableSalaries payableUnearned revenue
Stockholders EquityOwnership claims on assetsPaid-in capitalCommon stockRetained earnings
Basic Accounting EquationAssets = Liabilities + Stockholders Equity
Review Question 4Which of the following is not a correct representation of the accounting equation?a. Assets = Liabilities + Stockholders Equityd. Assets - Stockholders Equity = Liabilities c. Assets + Stockholders Equity = Liabilities b. Assets - Liabilities = Stockholders Equity
ReviewWhich of the following is not a correct representation of the accounting equation?a. Assets = Liabilities + Stockholders Equityd. Assets - Stockholders Equity = Liabilities c. Assets + Stockholders Equity = Liabilities b. Assets - Liabilities = Stockholders Equity
Review Question 5Using the accounting equation, answer the following question.If Liabilities = $10,000 andThen Assets = Stockholders Equity = $20,000$30,000 = $10,000 + $20,000$30,000
ReviewUsing the accounting equation, answer the following question.If Assets = $75,000Then Stockholders Equity = And Liabilities = $35,000$40,000$75,000 = $35,000 + $40,000
Thats all for today!