Chapter 1 - Business Decisions and Financial Accounting

Sole Proprietorship

Business organization owned by one person. Owner is liable for all debts.

Partnership

Business organization owned by two or more people. Each partner is responsible.

Corporation

A separate legal entity, owners are stockholders and not liable for debt.

The accounting system

Operating, investing, and financing activities

Accounting reports

Financial (external) and Managerial (Internal)

Assets

Measurable resources controlled by the company that are expected to provide future benefits to the company. (Cash, supplies, equipment, inventory, accounts receivable).

Liabilities

Measurable amounts the company expects to give up in the future to settle what it owes to creditors. (Notes payable, accounts payable)

Stockholders’ Equity

Owners’ claims to the business resources (common stock + retained earnings)

Common Stock

Equity paid by Stockholders

Retained Earnings

Equity earned by the company = the accumulating of net income or net loss over time. Earned and kept by the company.

Separate Entity Assumption

the financial reports of a business are assumed to include the results of only that business’ activities

Net income =

revenues - expenses

Revenues

Sales of goods or services to customers, measured at the amount the business charged the customer.

Expense

The cost of doing business necessary to earn revenue. Wages, advertising, insurance.

Dividends

distribution of the company’s earnings to its stockholders as a return on their investments. They are not an expense.

Income statement:

1, Revenues + expense, net income, for the time ended, always temporary

Statement of Retained Earnings

2, add net income, subtract dividends, for the time ended.

Balance Sheet

3, Assets, liabilities, stockholders’ equity, at date.

Statement of cash flows

4, cash flow from operating, investing, and financing. For the time ended

Why do Creditors look at financial statements?

Is the company generating enough cash to pay what it owes, does it have enough assets to cover its liabilities?

Why do investors look at financial statements?

What is the immediate return, through dividends on my contribution?

The Securities and Exchange Commission (SEC)

rules for financial statements, works GAAP rules, The FASB is the body to formulate GAAP.