Accounting

Buying stock > Investing in a partnership

(Stockholders = Shareholders) •Shares of stock are easy to sell (transfer ownership) •Individuals can become stockholders by investing small amounts of money •Easier for corporations to raise funds

Corporation

A business organized as a separate legal entity owned by stockholders. •Investors in a corporation receive shares of stock to indicate their ownership claim

Sole Proprietorship

A business owned by one person •Simple to set up & gives you control over the business •Tax advantages

Partnership

A business owned by two or more persons associated as partners. •Often formed because one individual does not have enough economic resources to initiate or expand the business •Partners can bring unique skills or resources to the partnership > Broader skills and resources •Partners should formalize duties and contributions in written partnership agreement •Tax advantages

Inventory

Goods available for future sales to customers (also an asset).

*Investing* Activities

Involves the purchase of the resources a company needs to operate

Common stock

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

Business Activities All business are involved in 3 types of activity...

•*Financing* - obtaining cash to start and grow the business •*Investing* - involves the purchase of the resources a business needs in order to operate •*Operating* - once a business has the assets it needs to get started, it begins operations (making and selling)

Assets, liabilities, expenses, and revenues are arranged in the format of *four different financial statements*

•*Income statement* - shows how successful your business preformed during a period of time, you report its revenues and expenses. •*Retained earnings statement* - 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 future growth. •*Balance sheet* - presents a picture at a point in time of what your business owns (its assets) and what it owes (its liabilities). •*Statement of cash flows* - shows where your business obtained cash during a period of time and how the cash was used.

External users

•*Investors* (owners) use accounting info to make decisions to buy, hold, or sell stock •*Creditors* (such as suppliers and bankers) use accounting info to evaluate the risks of selling credit or lending money.

Net income vs. Net Loss

•*Net income* - when revenues exceeds expenses Revenues *>* Expenses •*Net loss* - when expenses exceed revenues Revenues *<* Expenses

Other External Users

•*Taxing authorities* (ex: Internal Revenue Service IRS) want to know whether the company complies with the tax laws •*Customers* are interested in whether a company will continue to honor product warranties and otherwise support its product lines. •*Labor Unions* want to know whether the owners have the ability to pay increased wages and benefits. •*Regulatory agencies* (ex: Securities and Exchange Commission or Federal Trade Commission) want to know whether the company is operating within prescribed rules.

*Financing* Activities 2 primary sources of outside funds for corporations...

•Borrowing money (debt financing) •Issuing (selling) shares of stock in exchange for cash (equity financing)

Creditors vs. Stockholders (claims)

•Creditors: lending money allows them to specify a payment schedule. Has the legal right to be paid at agreed time. •Creditor claims must be paid before stockholder's claims •Stockholders have no legal right to expect any payments from stock ownership until all of the company's creditors are paid. •However, corporations can make payments (*dividends*) to stockholders on a regular basis as long as there is sufficient cash to cover required payments to creditors

Accounting Information System

Keeps track of each of the various business activities.

Internal users

Managers who plan, organize, and run a business. Includes: marketing managers, production supervisors, finance directors, and company officers.

Examples of Liabilities

May arise from expenses •*Accounts payable* - the obligations to pay for goods (when purchasing goods on credit from suppliers). •*Interest payable* - on outstanding amounts owed to the bank. •*Wages payable* - to a company's employees. •*Sales taxes payable, property taxes payable*, and *income taxes payable* - to the government.

Income Statement

Reports a company's revenues and expenses and resulting net income or loss for a period of time. •Investors are interested in a company's past net income because it provides useful information for predicting future income. > Buys and sells stock based on beliefs about a company's future performance •Creditors use the income statement to predict whether the company will be profitable enough to repay its loan. Amounts received from issuing stock are *not* revenues, and amounts paid out as dividends are *not* expenses (not reported on income statements).

Assets

Resources owned by a business. Different types of assets given different names... •Ex: Tootsie Roll's mixing equipment is a type of asset referred to as *property, plant, and equipment* •*Cash*, one of the more important asset.

Factors to consider when deciding which organizational form to choose (Sole Proprietorship, Partnership, Corporation)

Taxes & Legal Liability •Sole proprietorships and partnerships receive more favorable tax treatment •but are personally liable for all debts and legal obligations •Corporate stockholders are NOT... Generally pay higher taxes but have no personal legal liability.

Expenses

The cost of assets consumed or services used in the process of generating revenues. •Necessary to produce and sell the product. •Takes many forms and are identified by various names depending on the type of asset consumed or service used. Examples: •*Cost of goods sold* - such as cost of ingredients. •*Selling expenses* - such as the cost of salespersons' salaries. •*Marketing expenses* - such as the cost of advertising. •*Administrative expenses* - such as the salaries of administrative staff and telephone and heating costs incurred at corporate office. •*Interest expense* - amounts of interest paid on various debts •*Income taxes* - corporate taxes paid to the government.

Revenue

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 •Amounts earned on the sale of products. •Revenue arise from different sources depending on the nature of the business. > Sources common to many businesses: sales revenue, service revenue, and interest revenue.

Accounting

The information system that identifies, records, and communicates the economic events of an organization to interested users (Internal and External). Purpose of financial information is to provide inputs for decision-making.

Account receivable

The right to receive money in the future. If a company sells goods to a customer and does not receive cash immediately, then the company has the right to expect payment from that customer in the near future.

Liabilities

Amounts owed to creditors in the form of debts and other obligations Different type of liabilities, depending on their source •*Note payable* - written loan or promissory note between the lender and borrower to pay a specific amount of $ at a future date •*Bonds payable* - debt securities sold to *investors* that must be repaid at a particular date some years in the future

Supplies

Assets used in day-to-day operations.

Retained Earnings Statement

At the end of each *period*, a company must decide what portion of profits to pay shareholders in dividends. Companies prefer to retain part of the profits to allow for further expansion.

*Operating* Activities

Once a business has the assets it needs to get started, it begins operations.

Sarbanes-Oxley Act (SOX)

Passed to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals. •Top management must now certify the accuracy of financial information •Penalties for fraudulent financial activity are much more severe. •Increased independence of outside auditors who review the accuracy of corporate financial statements •Increased the oversight role of boards of directors

Creditors

Persons or entities to whom a company owes money