Study Notes on Business Organization and Accounting Information

Forms of Business Organization

• Sole Proprietorship

  • Simple to establish
  • Owner-controlled
  • Tax advantages

• Partnership

  • Shared control
  • Broader skills and resources
  • Tax advantages

• Corporation

  • Easier to raise funds
  • No personal liability
  • Easier to transfer ownership

Choosing an Organizational Form

• Consider the pros and cons of each form when establishing a business.
• Characteristics associated with organizational forms:
  1. Easier to raise funds: Corporation
  2. Simple to establish: Sole Proprietorship or Partnership
  3. No personal legal liability: Corporation
  4. Tax advantages: Sole Proprietorship or Partnership
  5. Easier to transfer ownership: Corporation

Users and Uses of Financial Information

Internal Users

• Internal users include:
  • Managers who plan, organize, and run a business such as:
  • Marketing managers
  • Production supervisors
  • Finance directors
  • Company officers

External Users

• Types of external users include:
  • Investors: Use accounting information to make decisions regarding buying, holding, or selling stock.
  • Creditors: e.g., suppliers and bankers evaluate risks based on accounting information to decide on credit sales or lending.

Data Analytics

• Involves analyzing data with software and statistics for decision support.
• Usage is becoming more prevalent across various companies due to:
  • Increased data access
  • Improved analytical software

Four Types of Data Analytics

1. Descriptive: What happened? (Past)
2. Diagnostic: Why did it happen? (Past)
3. Predictive: What is likely to happen? (Future)
4. Prescriptive: What should we do about it? (Future)

Ethics in Financial Reporting

• Trust is crucial for investors; they will hesitate to invest if they perceive a lack of credibility.
• Financial scandals (e.g., Enron, WorldCom) have led to:
  • The Sarbanes-Oxley Act (SOX), which was instituted to enhance the reliability of financial reporting.
• Effective financial reporting is linked to ethical behavior.

Solving Ethical Dilemmas

• Understanding the steps in resolving ethical dilemmas is vital for maintaining integrity in financial reporting.
• Important considerations in resolving dilemmas include the identification of alternatives and their impacts on stakeholders.