Accounting Chapter 1 | 1.1 Business Organization and Accounting Information Uses. Started on the heading "Forms of Business Organization"

What are the advantages of Corporation?

-Easier to transfer ownership -Easier to raise funds -No personal liability

Some examples of how accounting is used in business careers include the following. -General management: -Marketing: -Finance: -Real estate:

-General management: Managers of Ford Motors, Massachusetts General Hospital, California State University-Fullerton, a McDonald's franchise, and a Trek bike shop all need to understand accounting data in order to make wise business decisions. -Marketing: Marketing specialists at Procter & Gamble must be sensitive to costs and benefits, which accounting helps them quantify and understand. Making a sale is meaningless unless it is a profitable sale. -Finance: Do you want to be a banker for Citicorp, an investment analyst for Goldman Sachs, or a stock broker for Merrill Lynch? These fields rely heavily on accounting knowledge to analyze financial statements. In fact, it is difficult to get a good job in a finance function without two or three courses in accounting. -Real estate: Are you interested in being a real estate broker for Prudential Real Estate? Because a third party—the bank—is almost always involved in financing a real estate transaction, brokers must understand the numbers involved: Can the buyer afford to make the payments to the bank? Does the cash flow from an industrial property justify the purchase price? What are the tax benefits of the purchase?

What are the advantages of Sole Proprietorship?

-Simple to establish -Owner-controlled -Tax advantages

What are the advantages of Partnership?

-Simple to establish -Shared control -Broader skills and resources -Tax advantages

What are questions that internal users ask/Questions asked by Internal Users> -To Finance? -To Marketing? -To Human Resources? -To Management? *Illustration 1.1 To answer these and other questions, you need?

-To Finance? Is cash sufficient to pay dividends to Microsoft stockholders? -To Marketing? What price should Apple charge for an iPhone to maximize the company's net income? -To Human Resources? Can General Motors afford to give its employees pay raises this year? -To Management? Which PepsiCo product line is the most profitable? Should any product lines be eliminated? *Illustration 1.1 detailed information on a timely basis.

(HEADING: External Users) Questions that external users ask/Questions asked by External Users................some questions that investors and creditors may ask about a company are shown in Illustration 1.2. which are.... -To Investors? -To Investors? -To Creditors?

-To Investors? Is General Electric earning satisfactory income? -To Investors? How does Disney compare in size and profitability with Time Warner? -To Creditors? Will United Airlines be able to pay its debts as they come due?

Reading and using financial reports help the company benefit in the following ways. -The finance department will? -The production department will? -The human resources department will be?

-make better decisions about debt and equity financing and how much to distribute in dividends. -make better decisions about when to buy new equipment and how much inventory to produce. -better able to determine whether employees can be given raises.

When analyzing these various ethics cases and your own ethical experiences, you should apply the three steps outlined in Illustration 1.3. Steps in analyzing ethics cases. Solving an Ethical Dilemma

1. Recognize an ethical situation and the ethical issues involved. Use your personal ethics to identify ethical situations and issues. Some businesses and professional organizations provide written codes of ethics for guidance in some business situations. 2. Identify and analyze the principal elements in the situation. Identify the stakeholders---persons or groups who may be harmed or benefited. Ask the question: What are the responsibilities and obligations of the parties involved. 3. Identify the alternatives, and weigh the impact of each alternative on various stakeholders. Select the most ethical alternative, considering all the consequences. Sometimes there will be one right answer. Other situations involve more than one right solution; these situations require you to evaluate each alternative and select the best one.

Dividend

A distribution by a corporation to its stockholders on a pro rata (proportional to ownership) basis.

How will the study of accounting help you?

A working knowledge of accounting is desirable for virtually every field of business.

Most of the largest businesses in the United States, that are corporations are, for example are?

Coca-Cola, ExxonMobil, General Motors, Citigroup, and Microsoft

(HEADING: External Users) Customers are interested in whether a company like ____________ ______ will continue to?

General Motors honor product warranties and otherwise support its product lines.

(HEADING: External Users) Taxing authorities, such as the ____________ ___________ _________, want to know whether the?

Internal Revenue Service company complies with the tax laws.

(HEADING: External Users) Labor unions, such as the ___________ __________ ______________ _________ __________________, want to know whether the owners have the ability to?

Major League Baseball Players Association pay increased wages and benefits.

Dividends

Payments of cash from a corporation to its stockholders.

Sarbanes-Oxley Act (SOX)

Regulations passed by Congress to reduce unethical corporate behavior.

What is often organized as a partnership?

Retail and service-type businesses, including professional practices (lawyers, doctors, architects, and certified public accountants), often organize as partnerships.

(HEADING: External Users) Regulatory agencies, such as the _______________ ___ _____________ __________________ or the ____________ _____ _________________, want to know whether the company is operating? For example, Enron, Dynegy, Duke Energy, and other big energy-trading companies reported record profits at the same time as California was paying extremely high prices for energy and suffering from blackouts. This disparity caused regulators to investigate the energy traders to make sure that the profits were earned by legitimate and fair practices.

Securities and Exchange Commission Federal Trade Commission within prescribed rules.

What are examples of sole proprietorship?

Small owner-operated businesses such as barber shops, law offices, and auto repair shops. As are farms and small retail stores.

DO IT! 1 | Business Organization Forms In choosing the organizational form for your outdoor guide service, you should consider the pros and cons of each. Identify each of the following organizational characteristics with the organizational form or forms with which it is associated. 1.Easier to raise funds. 2.Simple to establish. 3.No personal legal liability. 4.Tax advantages. 5.Easier to transfer ownership. ACTION PLAN •Know which organizational form best matches the business type, size, and preferences of the owner(s).

Solution 1.Easier to raise funds: Corporation. 2.Simple to establish: Sole proprietorship and partnership. 3.No personal legal liability: Corporation. 4.Tax advantages: Sole proprietorship and partnership. 5.Easier to transfer ownership: Corporation.

What is a penalty for fraudulent activities in accounting?

They should be prosecuted for fraudulent activities under the Sarbanes-Oxley Act, as they knowingly misstated financial statement data.

What should you and your partner do to keep things in order?

You and your partners should formalize your duties and contributions in a written partnership agreement.

As a result of SOX, top management must now certify the _____________ __ ________________ ________________. In addition, penalties for fraudulent financial activity are much more severe. Also, SOX increased both the independence of the outside auditors who review the accuracy of corporate financial statements and the oversight role of boards of directors.

accuracy of financial information

There is no doubt that a sound, well-functioning economy depends on?

accurate and dependable financial reporting.

These forms of Business Organization are discussed extensively in?

business law classes.

A business organized as a separate legal entity owned by stockholders is a?

corporation.

Because the majority of U.S. business is done by __________________, the emphasis in this text is on the ______________ form of organization.

corporations corporate

One article in the Wall Street Journal noted that "repeated disclosures about questionable accounting practices have bruised investors' faith in the reliability of earnings reports, which in turn has sent stock prices tumbling." Imagine trying to carry on a business or invest money if you could not depend on the financial statements to be honestly prepared. Information would have no ______________.

credibility

Business decision-makers take advantage of this wealth of data/Accounting software systems by using?

data analytics to make more informed business decisions.

Accounting information is used to support business decisions using?

data analytics.

At one time, the financial press was full of articles about financial scandals at Enron, WorldCom, HealthSouth, and AIG. As more scandals came to light, a mistrust of financial reporting in general seemed to be?

developing.

Buying stock in a corporation is often more attractive than investing in a partnership because shares of stock are?

easy to sell (transfer ownership).

Circus-founder P.T. Barnum is alleged to have said, "Trust everyone, but cut the deck." What Sarbanes-Oxley does is to provide measures that (like cutting the deck of playing cards) help?

ensure that fraud will not occur.

The combined number of proprietorships and partnerships in the United States far _________ ___ _______ __ ________________. However, the revenue produced by corporations is ____ _____ _________.

exceeds the number of corporations. many times greater.

There are several types of __________ _____ of accounting information.

external users

If you choose a sole proprietorship or partnership, you generally receive more ___________________ ___ ________________ than a corporation. Proprietors and partners are personally ___________ ___ ___ ____ ___ ______ _______________________ of the business; corporate stockholders are not. Corporate stockholders generally pay ______ _____ but have no personal legal liability.

favorable tax treatment liable for all debts and legal obligations higher taxes

While sole proprietorships, partnerships, and corporations represent the main types of business organizations, ______ forms are now allowed in all states.

hybrid

In running a business, managers must answer many?

important questions.

Many businesses start as sole proprietorships or partnerships and eventually?

incorporate.

As both data access and analytical software improve, the use of data analytics to support decisions is becoming?

increasingly common at virtually all types of companies.

The purpose of financial information is to provide?

inputs for decision-making.

For internal users, accounting provides? In addition, companies present summarized financial information in the form of?

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. financial statements.

Users of accounting information can be divided broadly into two groups:?

internal users and external users.

Accounting

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

Probably the most common among these hybrids types are?

limited liability companies (LLCs) and subchapter S corporations.

(HEADING: External Users) Investors (owners) use accounting information to? Creditors such as suppliers and bankers use accounting information to?

make decisions to buy, hold, or sell stock. evaluate the risks of selling on credit or lending money.

What do internal users include?

marketing managers, production supervisors, finance directors, and company officers.

Selling a proprietorship or partnership interest is?

much more involved.

Partnerships are often formed because one individual?

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

Successful corporations often have thousands of stockholders, and their stock is traded on ______________ _____ _____________ like the ___ ____ _____ _____________.

organized stock exchanges New York Stock Exchange.

What do partner sometimes bring to a partnership?

partners bring unique skills or resources to a partnership.

A business owned by two or more persons associated as partners is a?

partnership.

Internal users of accounting information are managers who?

plan, organize, and run a business.

United States regulators and lawmakers were very concerned that the economy would suffer if investors lost confidence in corporate accounting because of unethical financial reporting. Congress passed the Sarbanes-Oxley Act (SOX) to?

reduce unethical corporate behavior and decrease the likelihood of future corporate scandals.

Individuals can become stockholders by investing? Therefore, it is?

relatively small amounts of money. easier for corporations to raise funds.

You will need to understand financial reports in any business with which you are associated. Whether you become a manager, a doctor, a lawyer, a social worker, a teacher, an engineer, an architect, or an entrepreneur, a working knowledge of accounting is?

relevant.

(HEADING: Ethics in Financial Reporting) People won't gamble in a casino if they think it is "______." Similarly, people won't "play" the stock market if they think stock prices are _______.

rigged rigged

Stockholders are sometimes called?

shareholders.

Investors in a corporation receive ______ __ _____ to indicate their ownership claim.

shares of stock

Data analytics involves analyzing data, often employing both ____________ and ______________, to draw inferences.

software and statistics

A ____ _____________________ is simple to set up and gives you control over the business.

sole proprietorship

What are the forms of Business organization?

sole proprietorship, partnership, and corporation.

A business owned by one person is a?

sole proprietorship.

Effective financial reporting depends on?

sound ethical behavior.

These hybrid business forms combine the ___ _________________ of partnerships with the _________ ____________ of corporations.

tax advantages limited liability

Other factors to consider in deciding which organizational form to choose are?

taxes and legal liability.

(HEADING: External Users) The information needs and questions of other external users?

vary considerably.

Accounting software systems collect?

vast amounts of data about the economic events experienced by a company and about the parties with whom the company engages, such as suppliers and customers.