Chapter 1: Intro to Financial Accounting
corporation
A business organized as a separate legal entity owned by stockholders
sole proprietorship
A business owned by one person
partnership
A business owned by two or more persons
Dividends
Payments of cash from a corporation to its stockholders.
Sarbanes-Oxley Act
Regulations passed by Congress in 2002 to try to reduce unethical corporate behavior.
examples of partnerships
Retail and service-type businesses, such as doctors
Common stock
Term used to describe the total amount paid in by stockholders for the shares they purchase.
expenses
The cost of assets consumed or services used in the process of generating revenues.
Liabilities
The debts and obligations of a business. Liabilities represent the amounts owed to creditors.
Accounting
The information system that identifies, records, and communicates the economic events of an organization to interested users.
True or false: If you choose a sole proprietorship or partnership, you generally receive more favorable tax treatment than a corporation
True
advantages of a corporation
easier to transfer ownership, easier to raise funds, no personal liability
external users
investors and creditors
Internal users
managers who plan, organize, and run a business
examples of internal users
marketing managers, production supervisors, finance directors, and company officers
Retained earnings
net income retained in the corporation
Why are partnerships typically formed?
not enough economic resources to initiate or expand the business, partners bring unique skills or resources to the partnership
disadvantages of partnerships
partners personally liable, transfer of ownership may be difficult
disadvantages of sole proprietorship
proprietor personally liable, financing may be difficult, transfer of ownership may be difficult
income statement
reports the success or failure of the company's operations for a period of time
account receivable
right to receive money in the future
advantages of partnership
simple to establish, shared control, broader skills and resources, tax advantages
benefits of a sole proprietorship
simple to set up, gives you control, owner controlled
examples of sole proprietorships
small owner-operated businesses such as barber shops, law offices
accounts payable
the obligations to pay for these goods
disadvantages of corporations
unfavorable tax treatment
creditors
use accounting information to evaluate the risks of selling on credit or lending money
investors
use accounting information to make decisions to buy, hold, or sell stock
Taxing authorities
want to know whether the company complies with the tax laws
Regulatory agencies
want to know whether the company is operating within prescribed rules
Labor unions
want to know whether the owners have the ability to pay increased wages and benefits
Customers
are interested in whether a company like General Motors will continue to honor product warranties and otherwise support its product lines
