Accounting Textbook
Chapter 1
Introduction to Financial Statements
Forms of Business Organization
Sole Proprietorship
* Tax advantages ~ Receive more favorable tax treatment than corporation however they are personally liable for all debts and legal obligations
* Small ownership operated business
* Owned by 1 person
* Simple to set up and gives you control
Partnership
* Simple to establish
* Shared control
* Broader skills and resources
* Tax advantages ~ Receive more favorable tax treatment than corporation however they are personally liable for all debts and legal obligations
* Often formed because one individual does not have enough economic resources
* Retail and service type businesses ~ The Counseling Group
Corporation
* Easier to transfer ownership
* Easier to raise funds
* No personal liability
* Separate legal entity owned by stockholders
* Investors receive shares of stock
* Individuals can become stockholders by investing relatively small amounts of money
* Stockholders are sometimes called shareholders
* Many businesses start as S.P. or P. and eventually incorporate
* The number of S.P. and P. in the US is more than 5 times the number of corporations
* The revenue produced by corporations is 8 times greater than that of S.P. and P.
Hybrid Forms
* Combine tax advantages of partnership with the limited liability of corporations
* LLCÕs, Subchapter S Corporations
Users and Uses of Financial Information
Accounting is the information system that identifies, records and communicates the economic events of an organization to interested users
Internal Users
* Marketing, Management, Finance, Human Resources
* Accounting provides internal reports such as financial comparisons of operating alternatives, projections of income from new sales campaigns and forecasts of cash needs for the next year
External Users
* Creditors, Investors
* Investors use accounting information to make decisions to buy, hold or sell stock
* Regulatory agencies want to know whether the company is operating within the prescribed rules
* Creditors use accounting information to evaluate the risks of selling on credit or lending money
* Labour unions want to know whether the owners have the ability to pay increases wages and benefits
* Taxing authorities want to companies complies with tax laws
* Consumers want to know if companies will continue to honour products warranties
Ethics in Financial Reporting
* Congress passed Sarbanes-Oxley Act of 2002
* SOX was passed to reduce unethical corporate behaviour and decrease the likelihood of future corporate scandals
* As a result of SOX top management must certify the accuracy of financial information, penalties for fraudulent activity has increased and the independence of auditors has increased
* Effective financial reporting depends on sound ethical behaviour
Business Activities
1. Financing
2. Investing
3. Operating
Financing Activities
The 2 primary sourcing of outside funds are:
1. Borrowing Money / Debt Financing
Amounts