1. Using this will help us arrive at the Financial Statements
D. Business Types
1. For Profit
2. Not For Profit
E. Legal Aspects of Business
1. Sole Proprietorship
a) Single Owner
b) Unlimited Liability
c) Income is taxable to owner
d) Difficult to raise capital
e) Limited Life
f) Controlled by owner
2. Partnership
a) Two or more owners
b) Share profits
c) Unlimited Liability except LLP’s
d) Income is taxable at a partner level
e) Relatively more difficult to raise capital
f) Relatively easier to create vs. Corporations
g) Unlimited Life
h) Controlled by Partners
i) Ownership transfer may be restricted
3. Corporation
a) Many share/stockholders
b) Limited Liability
c) Income is taxable at corporate level
d) Easy to raise capital relative to other forms
e) Heavily regulated
f) Must submit regulatory filing, typically every quarter and annual
period
g) Elects a board of directors
h) Unlimited life or continuity
i) Easy transfer of ownership
4. Tax laws could be different
F. Financial Information
1. Publicly traded Corporations
a) Shares available to be traded on a public stock exchange
I. The Financial Statements
A. Financial Statements
B. Forms of Business Organizations
C. Accounting Equation
2. Information
a) Must be uniform, relevant, reliable, timely and comparable
G. Accounting Rulemakers
1. FASB
a) Establishes rules and regulations for accounting
2. CPA’s
a) Expresses “opinion” on financial statements
3. SEC
a) Monitors and enforces accounting and reporting regulations
H. Fundamental Accounting Equations
1. To set up a business we need financing/money
2. Loans from outsiders
a) Liabilities (OWE to non owners)
3. Contribution or Capital or Equity is Owners Equity
4. Assets = Liabilities + Owners Equity (Shareholders Equity)
5. Long Term Assets (capital, things that can be used for long periods of
time)
6. Current Asset (typically assets used within a year or less)
7. Current liabilities (owed within a year)
I. Income Statement
1. How much a company has made over a period of time
J. Elements of the Income Statement
1. Revenue - Expenses = Income or Loss
K. Shareholders’ Equity
1. Paid-In Capital or Contributed Capital
a) The amount of stockholders have invested in the business
2. Retained Earnings
a) The amount of earned income kept for use in the business
b) Increases Shareholders’ Equity
3. Dividend
a) Cash given to shareholders
b) Decreases Shareholders’ Equity
4. Can split up retained earnings and dividends
II. Accounting Principles
A. Matching
1. Recognize expenses that match the revenues in the same period
a) Sales commission earned for December sales-paid in January
b) Must be recorded as expense in December
B. Reporting Period
1. Usually one year
C. Consistency
1. Same rules for all companies for all accounting periods
D. Going Concern
1. Ability to remain in business for the foreseeable future without becoming
bankrupt
E. Conservatism
1. Recognize losses if they are probable
2. Recognize gains only when they actually happen
F. Monetary Unit
1. Same reporting currency based on county of operations
G. Historical cost
1. Record actual cost of purchase - backed by purchase documents
H. Economic entity
1. Company is different from owners
I. Revenue Recognition
1. Recognize revenue only when earned not when received
J. Full disclosure
1. Disclose all significant items that could impact the decision of an
informed reader
K. Materiality
1. Omission of material item can have an impact on the decision
L. Comparability
1. Compare financial statements between periods and companies
M. Understandability
1. Simple and easy to follow
N. Relevance
1. Meaningful information that adds value to the user of financial statements
O. Reliability
1. Information presented is free from bias
III.
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