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ABM224 Chapter 1

Intro to Financial Statements

Sole Proprietorship A business owned by one person -simple to establish -owner controlled -tax advantages
Partnership A business owned by two or more persons associated as partners -simple to establish -shared control -broader skills and resources -tax advantages
Corporation A business organized as a separate legal entity owned by stockholders -easier to transfer ownership -easier to raise funds -no personal liability
Internal Users Managers who plan, organize, and run a business -marketing managers -production supervisors -finance directors -company officers
External Users -investors -creditors -taxing authorities -customers -labor unions -regulatory agencies
Investors Use accounting information to buy, hold, or sell stock
Creditors Such as suppliers and bankers use accounting info to evaluate the risks of selling on credit or lending money
Taxing Authorities Such as the IRS, want to know if the company complies with the tax laws
Customers Are interested in whether a company will continue to honor product warranties and otherwise support product lines
Labor Unions Want to know whether the owners have the ability to pay increased wages and benefits
Regulatory agencies Want to know whether the company is operating within prescribed rules
Sarbanes-Oxley Act (SOX) Congress passed to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals
Liabilities Amounts owed to creditors in the form of debt or other obligations
Note Payable Money borrowed to pay for items like delivery trucks
Bonds Payable Debt securities sold to investors that must be repaid at a particular date some years in the future
Common Stock The total amount paid in by stockholders for the shares they purchase
Dividends Cash payments to stockholders
Assets Resources owned by a company -property, plant, and equipment (fixed assests) -cash
Investing activities The purchase of the resources a company needs in order to operate -investments
Revenue The increase in assets or decrease in liabilities resulting from the sale of goods or the performance of services in the normal course of business -sales revenue -service revenue -interest revenue
Supplies Assets used in day to day operations
Inventory Goods available for future sales to customers are assets called...
Account recievable The right to receive money in the future
Expenses The cost of assets consumed or services used in the process of generating revenues -cost of goods sold -selling expenses -marketing expenses -administrative expenses -interest expense -income taxes
Accounts payable Obligations to pay for goods on credit from suppliers -interest payable -wages payable -sales tax payable -property taxes payable -income taxes payable
Income statement Report of revenues and expenses and a resulting net income or loss for a period of time
Retained earnings statement Indicates how much of previous income was distributed to you and the other owners of your business in the form of dividends, and how much was retained in the business to allow for future growth
Balance sheet A picture at a point in time of what your business owns (assets) and what it owes (liabilities)
Statement of cash flows Shows where your business obtained cash during a period of time and how that cash was used
Stockholders equity Owners claim to assets
Basic accounting equation Assets=Liabilities+Stockholder's Equity
Annual report Includes: -financial statements -management discussion and analysis section -notes to the financial statement -independent auditors report
Management discussion and analysis section presents managements views on the company's ability to pay near-term obligations, its ability to fund operations and expansion, and its results of operations
Unqualified opinion Given if the auditor is satisfied that the financial statements provide a fair representation of the company's financial position and results of operations in accordance with generally accepted accounting principles
Created by: ellieellie