Accounting Textbook

Chapter 1 Introduction to Financial Statements Forms of Business Organization Sole Proprietorship * Tax advantages ~ Receive more favorable tax treatment than corporation however they are personally liable for all debts and legal obligations * Small ownership operated business * Owned by 1 person * Simple to set up and gives you control Partnership * Simple to establish * Shared control * Broader skills and resources * Tax advantages ~ Receive more favorable tax treatment than corporation however they are personally liable for all debts and legal obligations * Often formed because one individual does not have enough economic resources * Retail and service type businesses ~ The Counseling Group Corporation * Easier to transfer ownership * Easier to raise funds * No personal liability * Separate legal entity owned by stockholders * Investors receive shares of stock * Individuals can become stockholders by investing relatively small amounts of money * Stockholders are sometimes called shareholders * Many businesses start as S.P. or P. and eventually incorporate * The number of S.P. and P. in the US is more than 5 times the number of corporations * The revenue produced by corporations is 8 times greater than that of S.P. and P. Hybrid Forms * Combine tax advantages of partnership with the limited liability of corporations * LLCÕs, Subchapter S Corporations Users and Uses of Financial Information Accounting is the information system that identifies, records and communicates the economic events of an organization to interested users Internal Users * Marketing, Management, Finance, Human Resources * Accounting provides internal reports such as financial comparisons of operating alternatives, projections of income from new sales campaigns and forecasts of cash needs for the next year External Users * Creditors, Investors * Investors use accounting information to make decisions to buy, hold or sell stock * Regulatory agencies want to know whether the company is operating within the prescribed rules * Creditors use accounting information to evaluate the risks of selling on credit or lending money * Labour unions want to know whether the owners have the ability to pay increases wages and benefits * Taxing authorities want to companies complies with tax laws * Consumers want to know if companies will continue to honour products warranties Ethics in Financial Reporting * Congress passed Sarbanes-Oxley Act of 2002 * SOX was passed to reduce unethical corporate behaviour and decrease the likelihood of future corporate scandals * As a result of SOX top management must certify the accuracy of financial information, penalties for fraudulent activity has increased and the independence of auditors has increased * Effective financial reporting depends on sound ethical behaviour Business Activities 1. Financing 2. Investing 3. Operating Financing Activities The 2 primary sourcing of outside funds are: 1. Borrowing Money / Debt Financing Amounts