Chapter 4

Classifications of financial transactions

Financing, Investing, and Operating activities. Financing raises funds; Investing purchases long-term assets; Operating covers day-to-day business expenses.

Equity investor

An owner of stock in a company who may earn returns through dividends or selling stock at a higher price.

Debt investor

A lender to a company who earns interest and receives principal repayment, without owning part of the business.

Difference between equity and debt investors

Equity investors own part of the company and bear risk; debt investors do not own the company and have a legal right to repayment.

Role of the SEC

Established in 1934 to ensure fair capital markets; requires public companies to file Forms 10K and 10Q, and audited annual reports.

GAAP and IFRS

GAAP: U.S. rules-based accounting standards. IFRS: International, principles-based standards used in over 100 countries.

Rules-based vs. principles-based

GAAP gives specific rules (rules-based); IFRS provides general guidelines (principles-based).

Basics of Sarbanes-Oxley

Requires accurate financial reporting, internal controls, and independent audits to protect investors.