Describe various organizational forms and business decision makers. 1-1

Partnership Business organization owned by two or more people. Each partner is personally liable for all debts of the business. Corporation A separate entity from both a legal and accounting perspective. Owners of corporations (stockholders) are not personally responsible for debts of the corporation. Sole Proprietorship Business organization owned by one person. The owner is personally liable for all debts of the business. 1-2

Source: BizStats.comBizStats.com 1-3

Business and Financing Activities Accounting System Accounting Reports FinancialManagerial External users (creditors, investors, etc.) Internal users (managers, etc.) Accounting is a system of analyzing, recording, summarizing and reporting the results of a business’s activities. 1-4

Describe the purpose, structure, and content of the four basic financial statements. 1-5

Resources Owned... by the company Resources Owed... to creditors to stockholders Separate Entity Assumption Requires that a business’s financial reports include only the activities of the business and not those of its stockholders. Assets = Liabilities + Stockholders’ Equity 1-6

Resources controlled by the company that have measurable value and are expected to provide future benefits to the company. Cash SuppliesFurniture Equipment 1-7

Amounts owed by the business to creditors. Notes Payable Accounts Payable 1-8

Owners’ claim to the business resources. Stock Certificate Contributed Capital Retained Earnings 1-9

Revenues Sales of goods or services to customers. They are measured at the amount the business charges the customer. Expenses The costs of business necessary to earn revenues, including wages to employees, advertising, insurance, and utilities. Revenues – Expenses = Net Income 1-10

Distributions of a company’s earnings to its stockholders as a return on their investment. Dividends are not an expense. 1-11

Income Statement Statement of Retained Earnings Balance Sheet Statement of Cash Flows Financial statements are typically prepared in this order. 1-12

Reports the amount of revenues less expenses for a period of time. The unit of measure assumption states that results of business activities should be reported in an appropriate monetary unit. 1-13

Reports the way that net income and the distribution of dividends affected the financial position of the company during the period. 1-14

Reports at a point in time: 1.What a business owns. 2.What it owes to creditors. 3.What is left over for the owners of the company’s stock. BASIC ACCOUNTING EQUATION Assets = Liabilities + Stockholders’ Equity 1-15

Summarizes how a business’s operating, investing, and financing activities caused its cash balance to change over a particular period of time. 1-16

Notes help financial statement users understand how the amounts were derived and what other information may affect their decisions. 1-17

Net income flows from the Income Statement to the Statement of Retained Earnings

Ending Retained Earnings flows from the Statement of Retained Earnings to the Balance Sheet

Cash on the Balance Sheet and Cash at End of Year on the Statement of Cash Flows agree

Explain how financial statements are used by decision makers. Describe factors that contribute to useful financial information. 1-21

Creditors (1)Is the company generating enough cash to make payments on its loans? (2)Does the company have enough assets to cover its liabilities? Investors (1)What immediate return ( through dividends ) on my contributions? (2)What is the long- term return ( through stock price increases resulting from the company’s profits )? … SCF … B/S … SRE.. I/S 1-22

Main Goal: Provide useful financial information to external users for decision making. Relevant Useful Faithful Representation Faithful Representation Faithful Representation Relevant 1-23

World Where? Who? What? IASB IFRS FASB United States United States GAAP 1-24