Accounting: Tools for Business Decision Making - Chapters 1 & 2

Sole Proprietorship: Owned and controlled by one person; simple to establish; offers tax advantages.
Partnership: Owned by two or more individuals; simple to establish; features shared control, broader skills and resources, and tax advantages.
Corporation: A separate legal entity; ownership is divided into shares of stock that are easily transferred on organized stock exchanges; easier to raise funds; provides limited liability with no personal liability for stockholders; subject to higher income taxes.
Hybrid Forms: Includes Limited Liability Companies (LLCs) and Subchapter S corporations; combines partnership tax advantages with corporate limited liability.

Internal Users: Managers who plan, organize, and run a business (e.g., marketing specialists, general management, finance teams).
External Users: Include investors (stockholders), creditors, taxing authorities such as the Internal Revenue Service, customers, labor unions, and regulatory agencies.
Four Types of Data Analytics:
- Descriptive: Answers what happened.
- Diagnostic: Answers why it happened.
- Predictive: Answers what is likely to happen.
- Prescriptive: Answers what should be done about it.
Sarbanes-Oxley Act (SOX): Legislation passed by Congress to reduce unethical corporate behavior and prevent financial scandals; requires top management certification of financial statements, increases penalties for fraud, enhances auditor independence, and increases board oversight.

Financing Activities: Raising funds from outside sources via debt financing (borrowing money creating liabilities such as notes payable and bonds payable) or equity financing (issuing shares of common stock; paying dividends to stockholders).
Investing Activities: Purchasing resources needed to operate the business, known as assets (e.g., property, plant, and equipment, or stock and bond investments in other companies).
Operating Activities: Day-to-day actions required to produce and sell goods or services, generating revenues (e.g., sales revenue, service revenue) and incurring expenses (e.g., cost of goods sold, salaries expense, utilities expense).

Order of Preparation:
1. Income Statement
2. Retained Earnings Statement
3. Balance Sheet
4. Statement of Cash Flows
Date Wording Standards:
- Income Statement, Retained Earnings Statement, Statement of Cash Flows: Use "For the Month Ended [Date]" because they report activity over a period of time.
- Balance Sheet: Uses the specific date (e.g., "June 30, 2025") because it provides a snapshot at a single point in time.

Income Statement Equation: $\text{Revenues} - \text{Expenses} = \text{Net Income (or Net Loss)}$
Retained Earnings Statement Equation: $\text{Beginning Retained Earnings} + \text{Net Income} - \text{Dividends} = \text{Ending Retained Earnings}$
Balance Sheet Equation (Basic Accounting Equation): $\text{Assets} = \text{Liabilities} + \text{Stockholders' Equity}$
Stockholders' Equity Components: $\text{Stockholders' Equity} = \text{Common Stock} + \text{Retained Earnings}$
Statement of Cash Flows Equation: $\text{Beginning Cash} + \text{Net Cash Flow from Operating, Investing, and Financing Activities} = \text{Ending Cash}$
Statement Interconnections:
- Net income calculated on the Income Statement moves to the Retained Earnings Statement.
- Ending retained earnings from the Retained Earnings Statement moves to the Balance Sheet under Stockholders' Equity.
- Ending cash on the Statement of Cash Flows matches the cash amount reported on the Balance Sheet.

Current Assets: Assets expected to be converted to cash or used up within one year or the operating cycle, whichever is longer. Listed in order of liquidity: $\text{Cash} \rightarrow \text{Accounts Receivable} \rightarrow \text{Supplies}$
Long-Term Investments: Investments in stocks and bonds of other corporations held for more than one year, long-term notes receivable, or land and buildings not currently used in operations.
Property, Plant, and Equipment: Physical assets with relatively long useful lives used in current operations; reported at book value: $\text{Book Value} = \text{Cost} - \text{Accumulated Depreciation}$
Intangible Assets: Assets lacking physical substance that grant exclusive rights (e.g., patents, copyrights, trademarks, goodwill).
Current Liabilities: Obligations to be paid within the next year or operating cycle (e.g., accounts payable, short-term notes payable, salaries and wages payable, interest payable).
Long-Term Liabilities: Obligations expected to be paid after one year (e.g., bonds payable, mortgages payable, long-term notes payable).
Stockholders' Equity: Represents owners' claims; divided into common stock (investments by owners) and retained earnings (income retained for business use).

Financial Statements: The core four statements presenting quantitative results.
Management Discussion and Analysis (MD&A): Management’s perspective on the company's ability to pay near-term obligations, fund operations, and results of operations.
Notes to the Financial Statements: Integral descriptions clarifying policies, uncertainties, and detailed financial figures.
Auditor's Report: Prepared by an independent certified public accountant (CPA), issuing an unqualified opinion if financial statements fairly present results in conformity with generally accepted accounting principles.

Public Accounting: Focuses on auditing, taxation, and management consulting (Employers: Deloitte, EY, KPMG, PwC, Grant Thornton, BDO, Baker Tilly; Certifications: CPA, EA, CISA).
Private Accounting: Focuses on financial accounting, managerial accounting, and internal auditing within for-profit or non-profit entities (Employers: Starbucks, Google, Red Cross; Certifications: CMA, CIA).
Governmental & Forensic Accounting: Public sector or investigative roles examining theft and fraud (Employers: IRS, FBI; Certifications: CGFM, CFE).

Prompt: What unethical practices occurred among staff at Dewey & LeBoeuf LLP?
- Response: Lower-level staff followed executive orders from the CFO and finance director to create fake invoices, overstate revenue, hide cash shortages, and intentionally submit incorrect information to external auditors.
Prompt: How does earning a professional license impact starting salaries in public accounting?
- Response: Obtaining a CPA license can increase a standard starting salary at a public accounting firm by approximately 10% to 15%.