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sole proprietorship - advantages

simple to establish, owner controlled, tax advantages

partnership - advantages

simple to establish, shared control, tax advantages, broafer skills and resources

corporation - advantages

easy to transfer ownership, greater capital rising potential,lowe legal liability

sole proprietorship - disadvantages

proprietor personally liable, financing may be difficult, transfer of ownership may be difficult

partnership - disadvantage

partners personally liable, transfer of ownership may be difficult

corporation - disadvantage

unfavorable tax treatment

internal users

users within the organization (finance, human reaources, marketing, managing)

external users

users outside the organization (investors, creditors)

Sarbanes-Oxley Act (SOX)

2002 - try to reduce unethical corporate behavior; 1- top management to certify accuracy of financial information, 2- severe penalties for fraudulent financial activity, 3- increases independence of auditors, 4- increased responsibility for board of directors

business activities

1- financing, 2- investing, 3- operating

financing activities

recieving cash from outside sources-- BORROWING FROM CREDITORS: liabilities (amounts owed to creditors), notes payable (bank loan), bonds payable (debt securities); SELLING SHARES OF STOCK TO INVESTORS: common stock (total amount paid in by stockholders for the shares they purchased), dividends (payments to stockholders)

investing activities

purchase of resources/assets needed to operate the business-- land, building, equipment, cash, investments in debt or equity securities of another company

operating activities

primary activies for which the organization is in business-- REVENUE (increase in asset sresulting from the sale of a product or service in the normal course of business), EXPENSES (cost of assets consumed or services used in the process of generating revenues), NET INCOME (revenue exceeds expenses), NET LOSS (expenses exceed revenue)

financial statements

balance sheet, retained earnings statement, income statement, statement of cash flows

balance sheet

presents a picture at A POINT IN TIME of what a business owes; shows relationship between assets, liabilities, and stockholders' equity A PARTICULAR DATE; basic accounting equation: ASSETS = LIABILITIES + STOCKHOLDERS' EQUITY

income statement

reports the success or failure of the company's operations DURING A PERIOD OF TIME; summarizes all revenue and expenses for period (month, quarter, or year); results in net income or net loss

retained earnings statement

indicates how much income was distributed as dividends and how much was retained in the business DURING A PERIOD OF TIME; indicates amount paid out in dividends and amount of net income/loss in the period; shows changes in retained earnings balance during period coverd by statement; time period is the same as that covered by the income statement... RETAINED EARNINGS @ begin of period + NET INCOME - DIVIDENDS = RETAINED EARNINGS @ end of period

statement of cash flows

shows sources of cash DURING A PERIOD OF TIME and how the cash was used; reports cash inflows and outflows resulting from financing, operating, and investing activities; reports the cash effects of a company's operations for A PERIOD OF TIME; shows cash increases and decreases from investing and financing activities; indicates increase or decrease in cash balance as well as ending cash balance


resources owned by the business which are expected to provide a value or service to the business at some point in the future


represents amounts owed to creditors; creditors claims (obligations or debts of the business) on total assets for resources or services provided to the business in the past

stockholders equity

owners claim on the company's total assets

interrelationships of statements

1- net income/loss from the income statement is added to beginning retained earnings to determine ending retained earnings; 2- ending retained earnings (reported on the retained earnings statement) is also reported on the balance sheet under stockholders' equity; 3- the ending amount of cash shown on the statement of cash flows must agree with the amount of cash on the balance sheet


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

annual report

report prepared by corporate management that presents financial information including financial statements, notes, a management discussion and analysis section, and an independent auditor's report

notes to financial statements

clarify information presented in the financial statements; describe accounting policies or explain uncertainties and contingencies

auditor's report

report prepared by an independent outside auditor stating the auditor's opinion to the fairness of the presentaion of the financial position and results of operations and their conformance with generally accepted accounting standards; indicates whether the financial statements and notes comply with the accounting standards; auditor (CPA, professional accountant) gives an "unqualified" opinion

basic accounting equation

assets = liabilities + stockholders' equity

Certified Public Accountant

CPA - an individual who has met certain criteria and is thus allowed to perform audits of corporations

common stock

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

comparitive statements

a presentation of the financial statements of a company for more than 1 year


payments of cash from a corporation to its stockholders


the cost of assets consumed or services used in the process of generating revenues


the debts and obligations of a business; represents the amount owed to creditors

management discussion and analysis

reports provided to shareholders; covers various financial aspects of a company: 1- ability to pay near-term obligations, 2- ability to fund operations and expansion, 3- results of operations

retained earnings

the amount of income retained in the corporation

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