Introduction to Specific Accounting-Related Concepts (ACFM 104)

Page 1: Introduction to Specific Accounting-Related Concepts

• Course: ACFM 104

• Focus: Key concepts in accounting, firm structures, and foundational terms used in financial reporting.

Page 2: The Four Types of Firms

• Sole Proprietorships

• Partnerships

• Limited Liability Companies (LLC or LLP)

• Corporations (S or C)

Page 3: Sole Proprietorships & Partnerships

• Not a separate legal entity

• Typically Private (see later slides for public vs. private)

• Sole Proprietorship: Single Owner

• Partnership: >1 owner; dissolved and reformed if ownership changes

• Legal obligations and liabilities cannot be separated from owners! This can create a dangerous situation!

• Pass through for taxes

  • Note: “Pass-through” means business income is taxed at the owners’ personal tax rates rather than at the entity level (no separate corporate tax when applicable)

Page 4: Limited Liability Company (LLC)

• Governed by state law

• Typically Private

• Becoming extremely popular

• Should create a separate entity; however, because the US uses a common law legal system this is still being tested

• Easy to create/form

• Pass-through for taxes/treated like partnership/sole proprietorship

Page 5: C Corporations

• Separate legal entity

• Ownership is evidenced by stock certificates

• Rights of ownership:

  • To vote

  • To share in corporate distributions

• Corporate governance structure

Page 6: Public versus Private Corporations

• Public corporations: shares offered to the public and are generally actively traded (bought and sold frequently)

• The company only receives proceeds (money) when the shares are offered to the public (separate entity)

• The entity concept

Page 7: Private corporation

• It is illegal to offer shares of a private corporation to the public (must first register with the SEC and state agencies)

• Very little, if any, regulation

• Usually only a few shareholders (could be as few as one)

• Sometimes referred to as “closely held” corporations

Page 8: The Role of Financial Accounting

• Enables analysis

• Supports the capital market decision process

• Financial reporting standards must be developed and adhered to

• Examples of public company scandals/instances: Enron, WorldCom, Quest, ZZZZ Best, etc.

Page 9: Accounting and Financial Reporting Terms

• Many synonymous terms, e.g.,

  • earnings, profits, income, net income

  • liabilities, debts, obligations

  • Equity, owner’s equity, shareholder’s equity, stakeholder’s equity

  • Equity = Owner’s Equity = Shareholder’s Equity = Stockholder’s Equity… difference is in organizational structure

• Many new terms, e.g.,

  • accrual/deferral

  • accounts receivable

  • accounts payable

Page 10: Some Definitions & Synonyms (Definitions & Relationships)

• Assets represent purchased resources that provide future benefit to the business

• Liabilities are financial obligations that must be paid (satisfied) at some point in the future

• Assets vs. Expenses: example contrast – using Doordash vs. buying a delivery van

  • Matching: Expenses should be matched to the period in which incurred/consumed/expended, often matched to revenues

• Inventory warning: Capitalization is creating an asset from purchases that will create future expenses

Page 11: Some Definitions & Synonyms (Continued)

• ACCRUAL: Event has transpired but cash has not exchanged

• DEFERRAL: Cash has exchanged but event has not transpired

Page 12: Alphabet Soup in Accounting!

• General Purpose Financial Statements are prepared in accordance with GAAP

• GAAP: Generally Accepted Accounting Principles

• FASB: Financial Accounting Standards Board

• SEC: Securities and Exchange Commission

• PCAOB: Public Company Accounting Oversight Board

• IFRS: International Financial Reporting Standards

• Note: These standards and bodies underpin the framework for financial reporting and auditing across different jurisdictions