com 201 chapter 1

Learning Objectives

• LO 1-1: Describe various organizational forms and business decision makers.

• LO 1-2: Describe the purpose, structure, and content of the four basic financial statements.

• LO 1-3: Explain how financial statements are used by decision makers.

• LO 1-4: Describe factors that contribute to useful financial information.

• LO1-S1: Examples of how accounting helps in pursuing other business careers.

• LO1-S2: Decision to become a public company and implications for accounting.

Organizational Forms

• Sole Proprietorship: Owned by one person; easy to set up; owner personally liable for business debts.

• Partnership: Owned by multiple persons; partners personally liable for business debts.

• Corporation: Separate legal entity; owners (shareholders) not personally liable for business debts; subject to regulations.

Accounting for Business Decisions

• Accounting: System for analyzing, recording, summarizing, and reporting a business’s activities for decision makers.

Financial Reporting and Decision Making

• Basic Accounting Equation: $ext{Assets} = ext{Liabilities} + ext{Shareholders’ Equity}$

  • Definitions:

  • Assets: Resources owned by the business.

  • Liabilities: Resources owed to creditors.

  • Shareholders’ Equity: Owners' claims on business resources.

Financial Statements Overview

1. Balance Sheet (Statement of Financial Position)

   • Purpose: Reports what a business owns, owes, and the equity for owners at a specific point in time.

   • Structure: $ext{Assets} = ext{Liabilities} + ext{Shareholders’ Equity}$

   • Separate Entity Assumption: Reports only the business’s activities, excluding owner’s personal activities.

2. Income Statement (Statement of Operations)

   • Purpose: Shows profitability (net income) from revenues after expenses.

   • Formula: $ext{Net Income} = ext{Revenues} - ext{Expenses}$

   • Unlike the balance sheet, it covers a period (month/year).

3. Statement of Retained Earnings

   • Purpose: Displays earnings retained in the business and dividends paid to shareholders.

   • Formula: $ext{Ending Retained Earnings} = ext{Beginning Retained Earnings} + ext{Net Income} - ext{Dividends}$

   • Dividends are not considered expenses.

4. Statement of Cash Flows

   • Purpose: Summarizes cash movements from operating, investing, and financing activities over a period.

   • Negative amounts (cash outflows) are shown in parentheses.

Notes to the Financial Statements

• Provides extra detail and context about the figures in the financial statements, helping users understand how they were derived.

Factors Contributing to Useful Financial Information

• Financial information should be:

  • Relevant: Useful for decision-making.

  • Timely: Provided when needed.

  • Faithful Representation: Accurate and complete.

  • Verifiable: Can be confirmed by others.

  • Comparable: Allows for comparisons over time or among different entities.

  • Understandable: Clear and easy to comprehend.

Careers Dependent on Accounting Knowledge

• Importance of accounting knowledge extends to various roles, including management, marketing, and operational positions.

Going Public: Implications for Accounting

• Public companies face enhanced reporting requirements, including disclosures of significant events affecting financial performance and management’s discussion and analysis (MD&A). Each annual report consists of:

  • Summarized financial data.

  • Management’s report on internal controls.

  • Comparative financial statements and notes.