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3 forms of business

Sole propritor, partnership, corporation (limited liablity corporation)

What is a busniness?

It provides goods and services

What must a business do to maxamize profits?

Gain advanatage of competitors

Profits =

Revenues - Costs

Business Stakeholder

A person or entity that has an interest in the economic performance and well being of a business

Examples of stake holders

employees/managers, customers, suppliers, bank, owners, government

Capital Markets Stakeholder

Provides financing

Examples of Capital market stakeholder

Banks, Owners, stockholders

Product/service market Stakeholders

Buyers of products, services and vendors

Examples of Product/Service market stakeholders

Customers, Suppliers

Government Stakeholders

Collects taxes, fees from business, employees

Example of Government Stakeholders

Federal, State, city government

Internal Stakeholders

People employed by business

Exmaple of Internal Stakeholders

Exmployees, managers

Financing Activities

Borrowing creates a liability, issuing ownership shares creates capital stock

Investing Activies

Obtaining assets to operate business

Operating Activities

Offer product, service


An information system that provides reports to stakeholders about the economic activies and condition of a business

4 Financial Statements

Income statement, retained earnings, balance sheet, statement cash flows

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

Balance sheet

Financial condition as of a point in time. Assets = Liabilities + SE

Cash flows

Change in finincal condition from changes in cash during a period that occur due a few reasons

Matching Concept

Used by the income statement, expenses for a period are ____against revnues for same peiod. Revenue - Expenses = Net Income

Retained Earnings

portion of net income retained by the business

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

Basic Elements

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

Balance sheet cash

Statement of cash flows CASH

When owner invests in company =

increase in SE, but no affect on income statement, but in cash flow, and financing activity

6000 dollars invested by owner is added to what from the balance sheet

asset and SE


Debts to the outsiders

Note Payable

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

The three types of Businesses

Manufacturing, merchandising, and service businesses


This type of buisiness change basic inputs into products that are sold to indivual customers

Examples of manufacturing businesses

Nike, Sony, Coca Cola


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

Merchandisers bring _______ and _______together

Products, Customers

Examples of Merchandising Businesses

Walmart, ToysRUs, Best Buy,


Type of business that provide services rather than products to customers

Examples of Service Businesses

Disney, Marriot, Google

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

What type of business form has a major influence on the economy


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

Corporations are taxed as

Seperate legal entities

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

Low-cost emphasis

Business designs and produces products or services at a lower cost than its competiros

Examples of Low cost emphasis businesses

Wal-Mart, Southwest Airlines

Premium-price emphasis

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 companys bus emphasis directly affects...

its economic performance

Business stakeholders

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

Financing activies

obtaining funds to begin and operate a business. Seek finacing through capital markets which tkae a form of borrowing or issuing shares of ownership.

When a business borrows money it incurs a



legal obligation to repay the amount borrowed according to the terms of the borrwoing agreemnt

Account Payable

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

For a corporation, shares of ownership are issued in the form of

shares of stock


sold to investors and normally require repayment with interest at a specific time in the future,. LONG TERM,

Bonds Payable

bond obligations are reported as thig

Note Payable

Requires payment of the amount borrowed PLUS INTEREST, either short term or long term

Capitol Stock

All the types of stock a corporation may issue




The resources owned by a business

Investing Activities

PURCHASING, invovle obtaining the necessary resources to start and operate the business

Operating Activities

CUSTOMERS AND SUPPLIERS, revnue, expenses, invovle using the business's resources according to its buisness emphais


Increase in assets from selling prodcuts or services. Identified accoording their sources.

Revneue recived from selling products


Revnenue received from providing services



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

Financial statemtns

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

Order of financial statemtns

Income statment, retained earnings, balance sheet, cash flow

Income statements

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

Retained earnings

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.

Balance Sheet

Reports the financial conditions as a point in time. Financial conditoin = ASSETS = LIABILITIES +STOCKHOLDERS EQUITIY= ACCOUNTING EQUATION

Assets include

cash, accounts reveivable, inventories, prepaid expenses, property, plant, and equipment, intangibles,

Liabilities include

Accounts apyable, accured iabilities, notes and other debt, income taxes

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

Cost conept

determines the amount initially enetered into the accounting records for puchaes

Going concern concept

Assumes a business will continue operating for an indefinite period of time

Matching concept

expenses are matched with the revenue generated during a period by those expenses

Horizontal analysis

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

What is the connecting link between the statement of cash flows and the income statement

Balance sheet

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