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

Describe various organizational forms and business decision

makers.

1-1

Sole Proprietorship

Business organization owned by one person. The owner is

personally liable for all debts of the business.

1-2

72%

20%

5% 3%

Percentage of Organizational Forms in the U.S.

Sole Proprietorships

Corporations

Partnerships

Limited Liability Companies

Source: BizStats.com1-3

Business and Financing Activities

AccountingSystem

Accounting ReportsFinancial ManagerialExternal 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

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Resources controlled by the company that have measurable

value and are expected to provide future benefits to the

company.

Cash

Supplies Furniture

Equipment

1-7

Amounts owed by the business to creditors.

Notes Payable

Accounts Payable

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Owners’ claim to the business resources.

Stock Certificate

Contributed Capital

Retained Earnings

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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

RevenuesPizza Revenue 11,000$ Total Revenue 11,000

ExpensesSupplies Expense 4,000 Wages Expense 2,000 Rent Expense 1,500 Utilities Expense 600 Insurance Expense 300 Advertising Expense 100 Income Tax Expense 500 Total Expenses 9,000 Net Income 2,000$

For the Month Ended September 30, 2010Income StatementPIZZA AROMA, INC.

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

Retained Earnings, Sept. 1, 2010 -$ Add: Net Income 2,000 Subtract: Dividends (1,000) Retained Earnings, Sept. 30, 2010 1,000$

For the Month Ended September 30, 2010

PIZZA AROMA, INC.Statement of Retained Earnings

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.

AssetsCash 14,000$ Accounts Receivable 1,000 Supplies 3,000 Equipment 40,000 Total Assets 58,000$

LiabilitiesAccounts Payable 7,000$ Notes Payable 20,000 Total Liabilities 27,000

Stockholders' EquityContributed Capital 30,000 Retained Earnings 1,000 Total Stockholders' Equity 31,000 Total Liabilities and Stockholders' Equity 58,000$

PIZZA AROMA, INC.Balance Sheet

At September 30, 2010

BASIC ACCOUNTING EQUATION

Assets = Liabilities + Stockholders’ Equity1-15

Cash Flows from Operating ActivitiesCash collected from customers 10,000$ Cash paid to suppliers and employees (5,000)

Cash Provided by Operating Activities 5,000 Cash Flows from Investing ActivitiesCash paid to buy equipment (40,000) Cash Used in Investing Activities (40,000) Cash Flows from Financing ActivitiesCapital contributed by stockholders 30,000 Cash dividends paid to stockholders (1,000) Cash borrowed from the bank 20,000 Cash Provided by Financing Activities 49,000 Change in Cash 14,000 Beginning Cash Balance, Sept. 1, 2010 - Ending Cash Balance, Sept. 30, 2010 14,000$

PIZZA AROMA, INC.Statement of Cash Flows


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.Retained Earnings, Sept. 1, 2010 -$ Add: Net Income 2,000 Subtract: Dividends (1,000) Retained Earnings, Sept. 30, 2010 1,000$



1

RevenuesPizza Revenue 11,000$ Total Revenue 11,000

ExpensesSupplies Expense 4,000 Wages Expense 2,000 Rent Expense 1,500 Utilities Expense 600 Insurance Expense 300 Advertising Expense 100 Income Tax Expense 500 Total Expenses 9,000 Net Income 2,000$

For the Month Ended September 30, 2010Income StatementPIZZA AROMA, INC.

1-18

Retained Earnings, Sept. 1, 2010 -$ Add: Net Income 2,000 Subtract: Dividends (1,000) Retained Earnings, Sept. 30, 2010 1,000$



Ending Retained Earnings flows from

the Statement of Retained Earnings to

the Balance Sheet.






2

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






Cash Flows from Operating ActivitiesCash collected from customers 10,000$ Cash paid to suppliers and employees (5,000)

Cash Provided by Operating Activities 5,000 Cash Flows from Investing ActivitiesCash paid to buy equipment (40,000) Cash Used in Investing Activities (40,000) Cash Flows from Financing ActivitiesCapital contributed by stockholders 30,000 Cash dividends paid to stockholders (1,000) Cash borrowed from the bank 20,000 Cash Provided by Financing Activities 49,000 Change in Cash 14,000 Beginning Cash Balance, Sept. 1, 2010 - Ending Cash Balance, Sept. 30, 2010 14,000$

PIZZA AROMA, INC.Statement of Cash Flows


3

1-20

• 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

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Main Goal: Provide useful financial information to external users for decision making.

RelevantRelevant

UsefulUseful

Faithful Representation



Relevant

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WorldWorld

Where?Where?

Who?Who?

What?What?

IASBIASB

IFRSIFRS

FASBFASB

United States

United States

GAAPGAAP

1-24

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

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