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