A person or entity that has an interest in the economic performance and well being of a business
An information system that provides reports to stakeholders about the economic activies and condition of a business
Income statement objective
change in financial condition due to operations (revenues and expenses for a period of time, month quarter year)
Retained earnings objective
change in financial condition due to changes in retained earnings during a period
Change in finincal condition from changes in cash during a period that occur due a few reasons
Used by the income statement, expenses for a period are ____against revnues for same peiod. Revenue - Expenses = Net Income
Reports change in financial condition from changes in cash during a period that occur due to
1. cash flows from operating activies, 2 cash flows from investing activities, cash flows from financing activities
Set of rules to record economic events, framework to prepare financial statements, controls to detect error
GAAP (Gennerally accepted accounting principles) determine
what to record, when to record, amount to record, they are the accounting "rules", Necessary so that the stakeholders can compare the financial condition and operating results across companies and across time
Integrated Final statement approach
Analyzes events and recording them into the accounting system. Summarizes which is the end result - income statement
When owner invests in company =
increase in SE, but no affect on income statement, but in cash flow, and financing activity
Borrowing money to finance the pracitive - you add this to the liablities which increases assets, financing occurs
Buying land for practice will
+ land - cash. Investing activity - comany is using cash to buy land. Business is investing in long term assets they
Organization in which basic resources (inputs) such as materials and labor are assmelbed and processed to provide goods or services (outputs) to customers
Objective of most businesses
Maxamize profits by providing goods or services that meet customer needs
difference between the amount received from customers for goods or services provided and the amount paid for the inputs used to provide the goods or services
Objective for not-so-profit businesses
provide some benefit to society, such as medical research or conservaion of natural resources
This type of buisiness change basic inputs into products that are sold to indivual customers
Type of business that also sells products to customers, but they do not make the products but purchase them from other businesses, such as manufactureers
The three types of forms ob business
Propritorship, partnership, corporation, or limited liability company
Owned by one indivudal. More than 70% of buss in US are this. It's easy and low cost organizing.
Disadvantages of Propritorships
Financial resources availbe to the bus are limited to the indivual owners resources.
Examples of Proprietorships
Small local businesses such as a hardware stores, repair shops, laundries, restaurants and maid services are often organized as prop
Owned by two or more indivudals. As a bus grows and requires more financial and managerial resources it may become this. 10% of buss are this
Examples of Partnerships
Like prop, small local bus such as automotive repair shops, music stores, beauty shops, and mens and womens clothing stores
Organized under state or federal statues as a seperate legal entity. The ownership of a corp is divided into shares of stock. Corporations may occur when a buss out grow its ability to finance its operations. About 20% of buss in US are organized as corps.
Advantage of Corporations
Ability to obtain large amounts of resources by issuing shares of stock, which are ownership rights in the coropation
Limited Liability Company (LLC)
Combines attributes of a partnership and a corporation in that it is organized as a corporation, but it can elect to be taxed as a partnership. It's owners(or memebers) liability is limited to their investment in the business
What are important considerations in choosing a form of business organizations?
Ease of formation and ability to raise large amounts of capital, the legal liability, tazes and limitation on life
What type(s) of form of bussiness is it when the owners have unlimited liability to creditors and for other debts of the company
Sole propritorships and partnerships
What type(s) of form of business is it when the owners liability is limited to the amount invested in the company?
Corporations and limited liability companies
Sole prop, partnerships and LLC are taxed by
passing through to the owners and taxed on the owners tax returns
Corporations are most likely to be what type of business?
Manufacturing because it requires a large amount of resrouces
How do businesses gain an advanatge over their competitors?
By using either a low-cost or a premium-price emphasis
Business designs and produces products or services at a lower cost than its competiros
A Bus tries to design and produce products or services that serve unique market neds, allowing it to charge premium prices
Examples of ways to percieve a product or service as unique based
quality, reliability, image or design
Examples of Premium-price emphasis businesses
Tommy Hilfiger (empahsis unieque image of its clothing), BMW (emphasizes unique driving style and prestige of its automobiles)
a person or entity that has an interest in the economic performance and well being of a business
The four types of buisness stakeholders
Capital market stakholders, product or service market, government, internal
Capital market stakeholders
provide the major financing for a business in order for it to begin and continue its operations
Product or service market stakeholders
include customers who purchase the businesses prdcuts or services as well as the venodrs who supply inputs to the business
In a product or service market stakeholders - customers have an economic interest in what?
In the continued success of the business
In Capital stock stakeholders, banks and other long term creditors have an exonomic interest in what?
Recovering the amount they loaned the business plus interest
obtaining funds to begin and operate a business. Seek finacing through capital markets which tkae a form of borrowing or issuing shares of ownership.
legal obligation to repay the amount borrowed according to the terms of the borrwoing agreemnt
When a business borrows from a VENDOR or SUPPLIER - buying on credit and prominsg to pay according to the terms set forth by the vendor or supplier. most require payment in relatively short period
sold to investors and normally require repayment with interest at a specific time in the future,. LONG TERM,
PURCHASING, invovle obtaining the necessary resources to start and operate the business
CUSTOMERS AND SUPPLIERS, revnue, expenses, invovle using the business's resources according to its buisness emphais
Costs used to earn revnue - rent, insurance, salries of manarers, wages of employeesm utilities
"language of business" - information system that provides reports to takeholders about the conomic activies and coniditions of a business
Two major objectives of financial accounting
Report the financial condition of a business at a point in time (snapshot - >measure the financial status of a bus and used by stakeholders to evaluate the bus financial health at the point in time) andto report changes in the financial condition of a business over a period of time (video -> measures the change in financial condition of a business for period of time, used tby stakeholders to predict how a bus will due in the future
The objectives of accounting are satified by recording the economic events affecting a bus and then summarizing the impact of these events on the bus in financial reports
reports the change in financial condition due to the operations of a business, REV AND EXPENSES = NET INCOME
Retained earnings statement
Reports changes in financial condition due to changes in retained earnings during a period
the portion of a corporations net income that is retained in the business, they depend upon net income so same time period as income statement
Why are divdendens reported in the retained earnings statement but not the income statment?
Dividends are not an expense, but are a distribution of net income to stockholders.
Reports the financial conditions as a point in time. Financial conditoin = ASSETS = LIABILITIES +STOCKHOLDERS EQUITIY= ACCOUNTING EQUATION
cash, accounts reveivable, inventories, prepaid expenses, property, plant, and equipment, intangibles,
Stockholders equity include
capital stock, retained earnings, repourachese stock and other equity itmes,
Statement of Cash Flows
Rpoerts the change in Financial condition due to the changes in cash during a period, it's organized by reporting the changes in the three activities
Business entity concept
applies accounting to a specific entity for which stakeholders need economic data. So an accountant can determine which economic data and activies should be analyzed, recorded, and summarized in the financial statemtns
Compares each item on the most recent financial statment with the related item on one or more earlier statments. Its a method of analysig financial performane by computing percentage increase and degreases in rleated items in comparitive financial statments
Financial Accounting system basic elements
set of rules for determing what, when and the amount that hsould be recorded for economic events, framework for preparing finanical statements and one or more controls to deteremine wheter errors may have arisen in the recording process
an economic even that under generally accepted accounting principles affects an element of the financial statements and, therefore, must be recorded.
In order to prepate financial statements _________ must be analyzed, recorded and summarized using a framework
Use integrated financial statement approach for
analyzing, recording and summarizing transactions by expanding the accouting equation