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Business Forms Businesses have three basic options when deciding which form a new business will take. These include: sole proprietorship, partnership, and corporation. Business Forms Corpora- tion Partner- ship Sole proprietor

Generally Accepted Accounting Principles Generally accepted accounting principles (GAAP) are the accounting standards, rules, principles, and procedures that comprise authoritative practice for financial accounting. These principles have been developed over time by several regulators. SEC FASB AICPA

International Accounting Regulatory Bodies The IASB is a board, similar to the FASB, whose mission is to develop a single set of high quality international standards requiring transparent and comparable information. Accounting is practiced throughout the world, and there is a movement to develop one set of international accounting standards to be used by all countries. Those standards, which have both similarities to and differences from GAAP, are called International Financial Reporting Standards (IFRS).

To ignore product safety?? The Classified Balance Sheet A Classified Balance Sheet Asset categories Liabilities Groups together accounts of similar nature and reports them in a few major classifications. Equity Current assets Long-term investments Fixed assets Intangible assets Other assets Current & Long-term Retained Earnings Contributed Capital

Balance Sheet Classifications 6 Items are grouped by category in the balance sheet. Current Assets (Convert to Cash in 1 year or less) Noncurrent Assets (All other assets) Current Liabilities (Paid with Cash in 1 year or less) Noncurrent Liabilities (All other liabilities) ASSETSLIABILITIES

The Multi-Step Income Statement Gross profit, which is sometimes called gross margin, represents the profit that a company generates when considering only the sales price and the cost of the product sold. After gross profit is reported, operating expenses are listed. Operating expenses are the expenses that a company incurs during normal operations. Operating profit represents the profit that a company generates when considering both the cost of the inventory and the normal expenses incurred to operate the business. Income before taxes, also called earnings before income taxes and other similar titles, represents the profit that a company generates when considering all revenues and expenses except for income taxes. When this provision for income taxes is subtracted from income before taxes, the final income measure, net income, is determined.

Horizontal Analysis

Horizontal Analysis Example Bed Bath & Beyond Balance SheetFeb. 26, 2011Feb. 27, 2010 Merchandise inventory$1,968,907$1,759,703 Bed Bath & Beyond Income StatementFeb. 26, 2011Feb. 27, 2010 Net earnings$791,333$600,033 Two calculations required for horizontal analysis Calculations using Bed Bath & Beyond data

Vertical Analysis The base account is total assets for balance sheet accounts and net sales or revenues for income statement accounts. The two calculations for vertical analysis on the balance sheet and income statement are shown above.

Common-Size Statements The product of a vertical analysis is sometimes called a common-size financial statement It is a statement in which all accounts have been standardized by the overall size of the company. They allow investors and creditors to determine the importance of each account to the overall company.

Vertical Analysis Example Calculations using Bed Bath & Beyond data Bed Bath & Beyond Balance SheetFeb. 26, 2011Feb. 27, 2010 Merchandise Inventory$1,968,907$1,759,703 Total assets5,646,1935,152,130 Bed Bath & Beyond Income Statement Net earnings $791,333$600,033 Net sales8,758,503$7,828,793

The Statement of Stockholders’ Equity A statement of stockholders’ equity is a financial statement that shows how and why each equity account in the company’s balance sheet changed from one year to the next. It therefore focuses not only on retained earnings, but also on other equity accounts relating to a company’s contributed capital.

Information Beyond the Financial Statements A company’s financial statements contain a significant amount of information about the financial activities and position of the company. However, they are not exhaustive, and much information that is useful to creditors and investors is not included on the statements. Instead this information is found in: Notes to the financial statements Auditor’s report Management’s Discussion and Analysis

End of Chapter 2