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3 Types of Ownership

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1. Sole Proprietorship 2. Partnership 3. Corporation

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Sole Proprietorship

answer

Revenue + expenses over a period of time

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What are some advantages of a sole proprietorship?

answer

-simple to establish -owner controlled -tax advantages

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Partnership

answer

a business owned by two or more persons

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Why are partnerships commonly formed?

answer

because one individual does not have enough economic resources to initiate or expand the business

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What is another advantage of this?

answer

partners bring unique skills or resources to the partnership

question

What are the advantages to a partnership?

answer

-simple to establish -shared control -broader skills and resources -tax advantages

question

Corporation

answer

business organized as a separate legal entity owned by stockholders

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What do investors in a corporation receive to indicate their ownership claim?

answer

shares of stock

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Why is buying stock in a corporation is often more attractive than investing in a partnership?

answer

easy to sell (transfer ownership)

question

What are some advantages to a corporation?

answer

-easier to transfer ownership -easier to raise funds -no personal liability

question

Why is it easier for corporations to raise funds?

answer

individuals can become stockholders by investing relatively small amounts of money

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What is the one major disadvantage of corporations?

answer

taxed heavier (double)

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What do hybrid business forms do?

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combine the tax advantages of partnerships with the limited liability of corporations

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What are the most common hybrid types?

answer

-limited liability companies (LLCs) -subchapter S corporations

question

The combined number of proprietorship and partnerships in the U.S. is more than ____ times the number of corporations.

answer

5

question

The revenue produced by corporations is ____ times greater.

answer

8

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Accounting

answer

the information system that identifies, records, and communicates the economic events of an organization to interested users

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What are the 2 groups of users of accounting information?

answer

1. internal 2. external

question

Internal users

answer

managers who plan, organize, and run a business

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What are some examples of internal users?

answer

-marketing managers -production supervisors -finance directors -company officers

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What does accounting provide internal users?

answer

-internal reports such as financial comparisons of operating alternatives -projections of income from new sales campaigns -forecasts of cash needs for the next year

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Types of external users

answer

-investors -creditors -taxing authorities -customers -labor unions -regulatory agencies

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Why do investors use accounting information?

answer

to make decisions to buy, hold, or sell stock

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Why do creditors use accounting information?

answer

to evaluate the risks of selling on credit or lending money

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Why do taxing authorities use accounting information?

answer

to know whether the company complies with tax laws

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Why do customers use accounting information?

answer

whether companies will continue to honor product warranties and otherwise support its product line

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Why do labor unions use accounting information?

answer

to know whether the owners have the ability to pay increased wages and benefits

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Why do regulatory agencies use accounting information?

answer

to know whether the company is operated within prescribed rules

question

Sarbanes-Oxley Act (SOX)

answer

act to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals

question

What things changed under SOX?

answer

-top management must now certify the accuracy of financial information -penalties for fraudulent financial activity more severe -increased the independence of outside auditors who review the accuracy of corporate financial statements -increased the oversight role of boards of directors

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What are the 3 types of activity for businesses?

answer

1. financing 2. investing 3. operating

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Accounting information system

answer

keeps track of the results of each of the various business activities--financing, investing, and operating

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What are the 2 primary sources of outside funding for corporations?

answer

1. borrowing money (debt financing) 2. issuing (selling) shares of stock in exchange for cash (equity financing)

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Creditors

answer

persons or entities to which a company owes money

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Liabilities

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amounts owed to creditors

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bonds payable

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debt securities sold to investors that must be repaid at a particular date some years in the future

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Common stock

answer

the term used to describe the total amount paid in stockholders for the shares they purchase

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Dividends

answer

cash payments to stockholders

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Assets

answer

resources owned by a business

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What are the different types of assets?

answer

-property, plant, and equipment -cash -investments

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Revenues

answer

amounts earned on the sale of products

question

Revenue

answer

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

question

Types of revenue

answer

1. sales revenue 2. service revenue 3. interest revenue

question

Short lived assets that are not purchased through investment include what?

answer

-supplies -inventory

question

Account receivable

answer

when a company does not receive payment immediately, then they have the right to expect payment from that customer in the near future as an account receivable

question

Expenses

answer

the cost of assets consumed or services used in the process of generating revenues

question

Types of expenses

answer

-cost of goods sold -selling expenses -marketing expenses -administrative expenses -interest expenses -income taxes

question

Cost of goods sold

answer

cost of ingredients

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Selling expenses

answer

cost of salesperson' salaries

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Marketing expenses

answer

cost of advertising

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Administrative expenses

answer

salaries of administrative staff, and telephone and heating costs incurred at the corporate office

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Interest expense

answer

amounts of interest paid on various debts

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Income taxes

answer

corporate taxes paid to the govt

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Accounts payable

answer

the company's obligation to pay for items purchased on credit

question

Net income

answer

when revenues exceed expenses

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Net loss

answer

when expenses exceed revenues

question

4 different financial statements

answer

1. income statement 2. retained earnings statement 3. balance sheet 4. statement of cash flows

question

Income statement

answer

shows how successfully your business performed during a period of time by reporting its revenues and expenses

question

Retained earnings statement

answer

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

question

Balance sheet

answer

presents a picture at a point in time of what your business owns and what it owes (its assets and liabilities)

question

Statement of cash flows

answer

shows where your business obtained cash during a period of time and how that cash was used

question

Why are financial statement users interested in net income?

answer

because it provides useful information for predicting future net income

question

Amounts received from issuing stock are not ____, and amounts paid out as dividends are not _______.

answer

revenues, expenses

question

What question does an income statement answer?

answer

Are the company's operations profitable?

question

Retained earnings

answer

net income retained in the corporation

question

Retained earnings statement

answer

shows the amounts and causes of changes in retained earnings for a specific time period -the time period is the same as the income statement's

question

What question does a retained earnings statement answer?

answer

What is the company's policy toward dividends and growth?

question

Balance sheet

answer

reports assets and claims to assets at a specific point in time

question

Stockholders' equity

answer

the owners' claim to assets

question

Basic accounting equation

answer

assets=liabilities + stockholders' equity

question

What question does a balance sheet answer?

answer

does the company rely primarily on debt or stockholders' equity to finance its assets?

question

Statement of cash flows

answer

provides financial information about the cash receipts and cash payments of a business for a specific period of time

question

Annual report

answer

includes the 4 financial statements and other important information such as a management discussion and analysis section ,notes to the financial statements, and an independent auditor's report

question

Management discussion and analysis

answer

presents management's views on the company's ability to pay near-term obligations, its ability to fund operations and expansions, and its results of operations

question

Notes to the financial statements

answer

clarify the financial statements, and provides additional detail

question

Auditor's report

answer

prepared by an independent outside auditor and states the auditor's opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with generally accepted accounting principles

question

Auditor

answer

an accounting professional who conducts an independent examination of a company's financial statements

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