Accounting 1

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The three basic business functions

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(1) manufacturing
(2) merchandising
(3) service.

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Manufacturing business

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a business that assembles or constructs a tangible products for sale to customers. Manufacturing business customers are typical wholesale or retail merchandisers involved in the distribution of manufactured products to the ultimate end user or consumer.

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Retail merchandiser

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A distrubution business that typically purchases finished goods from manufacturers or wholesale merchandisers for the purpose of selling those goods to the end user or consumer.

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Wholesale merchandiser

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A distribution or merchandising business that typically purchases finished products from manufacturers and then sells those products to retail merchandisers.

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Service business

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a company devoted to providing services to clients or customers rather than tangible products.

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Non profit business

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a business operated with no intent to produce a profit for the business owners. non-profit businesses are generally operated to fulfill some charitable or social purpose of interest to the business owners.

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Capital

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money or other assets owned by a company. most businesses require capital to operate. in other words, it usually takes money to make money.

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Three ways of obtaining capital

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debt financing--borrowing of assets
capital contributions--owners equity
retained earnings--owners equity

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financing

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the way a company gets the capital or assets necessary to operate, through either debt or equity financing

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Balance sheet

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reports a company's total assets and the amount of those assets financed through debt (liabilities) and equity (owners' equity)

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debt financing

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the acquring of business assets through borrowing or incurring liabilities. referred to as "temporary financing" because any borrowed assets must be repaid in the future.

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Creditor

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any entity to whom a company has an obligation is a creditor of the company, and are providers of a company's debt financing

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bankruptcy

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a legal status resulting from a company's inability to pay its debts. may be voluntary by an insolvent (unable to pay their debts) company or it can be imposed by creditors due to defaults on loans or other debts.

the resolution of bankruptcy may require liquidation of certain assets, dissolution of the company or the restructuring of debt and/or equity interests in the company

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Interests in a company

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A phrase referring to ownership rights in a company. A person has inerests in a company if they are a stockholder, partner or proprietor`

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Foreclosure

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the forced sale of an asset intended to generate cash in full or partial payoff of a loan. typically takes place when a borrower is in default on a loan secured with collateral.

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Equity financing

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acquiring of assets or resources for a business through either owners' capital contributions or retained earnings.

also referred to as permanent financing because there is no obligation for a company to repay the assets provided, except in the case of business dissolution.

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dissolution

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the process of closing a company's operations, liquidating its assets, paying off its debts, distributing any residual assets to owners and legally terminating the company.

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investor

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a provider of capital to a company. the term "investor" is most commonly associated with providers of equity financing; however, providers of debt financing might also refer to a loan as an "investment"

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Shares

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a share of stock represents a single unit of ownership in a corporation and has equal voting and dividend rights with every other share of stock in its class, either common or preferred

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Common stock

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the basic form of ownership for all corporations. common stockholders have the right to vote in certain corporate matters and the right to participate equally per share in any dividends and distributions in the event of dissolution, subject to preferences that may exist for preferred stockholders

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preferred stockholders

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A supplemental form of ownership used in some corporations in addition to common stock. Preferred stockholders typically have no voting rights, but do have a limited priority right over common stockholders to declared dividends and any distributions arising from corporate dissolution.

most companies do not issue preferred stock, but it can be an attractive option in accessing capital and no sacrifice of voting rights.

most preferred stock investors ar other corporations looking to earn a fairly reliable fixed dividend return that is excluded form income taxation under federal tax law.

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distributions in the event of dissolution

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amount paid to a company's owners upon dissolution of the company. the amount paid to owners will be the amount of any assets left after liquidation of a company's assets and payoff of all company debts.

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NYSE

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The New York Stock Exchange.

the oldest and largest stock exchange in the U.S. located on Wall Street in NYC, the NYSE is a secondary market for the trading of securities (stocks and bonds) listed with the exchange.

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secondary market

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market or exchange where previously issued and publicly held investment securites (stocks and bonds) can be bought and sold. NYSE and NASDAQ are secondary markets.

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Underwriters

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an intermediary between a company issuing stocks or bonds and the investing public, usually an investment banking company.

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NASDAQ

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National Association of Securities dealers Automated Quotations system. A computerized system established to facilitate public trading of securities.

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Financial accounting

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the system of accounting designed to provide a company's financial information to users who are external to the company's management--ie current or prospective investors and govt. regulatory agencies.

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required GAAP financial statements

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income statement
balance sheet
statement of cash flows

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Managerial accounting

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the system of accounting designed to provide info useful to a company's managers in improving operations.

reports produced more often and focus more on the future instead of the past like financial accounting

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Financial statements

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also referred to as "general purpose financial statements"
required:
-balance sheet
-income statement
-statement of cash flows

often included
-statement of owners' equity
-statement of retained earnings/deficits

Notes are also required to give contextual info

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balance sheet

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also referred to as a 'statement of financial position.' lists all of an entity's assets, liabilities and owners' equity.

reports a company's
-assets
-amount of these assets financed by creditors
-amount of these assets financed by owners through capital contributions and retained earnings

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income statement

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sometimes referred to as a 'statement of operations,' 'statement of profit and loss,' 'P&L statement' or 'statement of earnings.

lists a company's revenues less expenses and the resulting net income or net loss for a period of time.

A company's earnings per share must also be disclosed in the income statement.

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statement of cash flows

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designed to highlight a company's change in cash during an accounting period with a summary of the major factors giving rise to cash increases and decreases.

discloses a company's cash flows under three basic activities:
1. operating
2. investing
3. financing activities

used most for projecting future

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Annual report

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a public prepared by a company's management at the end of each year describing the company's results of operations and financial position through audited general purpose financial statements.

usually includes a section where management gives their take on the company's current operations and prospects for the future.

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GAAP

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Generally accepted accounting principles, the standards or rules of accounting used in the U.S. in preparation of general purpose financial statements.

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FASB

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financial accounting standards board, currently responsible for the establishment of GAAP in the U.S.

supported (funded) and directed by the Financial Accounting Foundation. the SEC has ultimate legal authority to determine what info must be provided.

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SEC

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Securities and Exchange Commission. a federal regulatory agency charged with the responsibility of regulating the issuance and trading of securities of publicly-held companies in the U.S.

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AICPA

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American Institute of Certified Public Accountants.

A private professional organization for CPAs (certified public accountants). This organization establishes standards of conduct for its members including GAAS (generally accepted auditing standards).

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CPA

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Certified Public Accountant.

Have been licensed by a state and are authorized to provide certain services to customers, including the certified audit of a company's general purpose financial statements.

they also often provide tax advice, prepare tax returns, advise businesses and individuals in financial affairs, consult and assist businesses in improvements of their accounting info systems, and provide consulting services in a wide variety of business areas.

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Auditor's report

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a letter issued by a CPA firm subsequent to their audit of a company's financial statements. The letter is included in the annual report and declares the auditor's opinion as to the fairness of the company's financial statements in properly disclosing the company's financial position, results of operations and cash flows for the periods reflected in accordance with GAAP.

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Proprietorship

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business ownership in which a single individual owns all the business assets, bears all the business liabilities and is the sole beneficiary of any net income or losses from business operations.

Main disadvantage: the lack of any separate legal liability between the business and the owner.

not taxed separate from the individual.

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Partnership

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two or more individuals and/or organizations share in the ownership of all the business assets, liabilities and profit or losses.

Can be formed verbally; not recommended

Main disadvantage:
the lack of any separate legal liability between the business and the partners--personal assets at risk.

not taxed separate from the individuals.

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corporation

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authorized by a state govt. to exist and function subject to the laws of the state. have separate legal status allowing owners of a corporation to benefit from its business activities without exposing their personal assets to claims that may arise against the business.

Issue stock to raise capital.

Main disadvantage:
federal and state taxation of corporate profits--taxed a second time if and when they are distributed to stockholders as a dividend.
---can be avoided but requires planning and compliance with specific provisions of the law, such as LLCs and S corporations.

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S corporation

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an electable status under the IRS cod that allows for a corporation to avoid fed. income taxation and requires instead that all taxable income or losses of the business be attributed directly to the stockholders of the corporation in their taxable income.

allows for taxing as though a partnership, taken only on the individual level

generally speaking, only corporations with relatively few domestic, non-corporate stockholders may qualify.

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LLC

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Limited Liability Corporation.

A corporate form of business ownership that enjoys some partnership characteristics including the possible avoidance of federal corporate income taxes, while maintaining limited legal liability for its owners.

Most cases restrictions on number of stockholders allowed and limits certain transfers of ownership.

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LLP

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Limited Liability Partnership

Legal shielding of a business owner's personal assets from claims against the business; shields not usually provided unless formed as LLPs under state law.

Treated as partnership for tax purposes and exempt from separate income taxation faced by corporations