Accounting Midterm 1 Csulb

Front 1

Sole proprietorship

Back 1

a business owned by one person (hair salons, auto repair shops, and free-lance editors)

 Advantagessimple to establish ; owner controlled ; tax advantages that are more favorable than a corporation

 Disadvantages proprietor personally liable for all business debts; financing may be difficult ; transfer of ownership may be difficult

Front 2

Partnership

Back 2

a business owned by two or more people (retail and service type businesses including professional practices (lawyers, doctors, etc.)

Advantages simple to establisho shared control ; broader skills and resources ; tax advantages that are more favorable than a corporation Disadvantages partners personally liable for all business debts ; transfer of ownership may be difficult

Front 3

Corporation

Back 3

a separate legal entity owned by stockholders (Coca- Cola, Exxon-Mobil, General Motors, Citigroup, and Microsoft)

Advantages easier to transfer ownership ; easier to raise funds ; no personal liability for stockholders

Disadvantageso unfavorable tax treatment resulting in higher taxes paid by stockholders

Front 4

Internal Users

Back 4

users within the organization.

Internal users and questions they may ask: Marketing What price will maximize the company’s net income?Human Resources Can we afford to give employees pay raises this year?Finance Is cash sufficient to pay dividends to stockholders?Management Which product line is most profitable? What should beeliminated?

Front 5

External Users

Back 5

users who are outside the organization.

Questions theymay ask:Investors (current andpotential)Is the company earning satisfactory income?How does the company compare in size andprofitability with competitors? Should I buy, sell, or holdthis stock?Creditors (suppliers andbankers)Will the company be able to pay its debts as theycome due? How risky is this company?IRS, SEC, FTC, laborunions, customersIs the company complying with rules and regulations?Is the company properly paying its taxes? Can the companyafford to pay increased wage and salaries? Will thecompany be able to stand behind its warranties?

Front 6

Financing Activities

Back 6

Cash is often obtained from outside sources to start or expand a business.The two primary sources are:

Borrowing from creditors which creates liabilitieso bank loan (note payable)o debt securities (bonds payable)o goods on credit from suppliers (accounts payable)

Issuing ownership interests in the corporation to investors (selling common stock toshareholders) In addition, financing activities include using cash to pay dividends to stockholders.

Front 7

Investing Activities

Back 7

– Cash raised through financing activities is used for investing in resources(assets) needed to operate the business (i.e., land, buildings, delivery trucks, equipment,computers, furniture, etc.).

Front 8

Operating Activities

Back 8

Once a business has the assets it needs to get started, it begins its operations.Operating activities involve revenue and expenses. Revenue is the increase in assets resulting from the sale of goods or the performance ofservices – Sources of revenue common to many businesses are sales revenue, servicerevenue, and interest revenue. Assets that result from operating activities include supplies,inventory, and accounts receivable. Expenses are the cost of assets consumed or services used in generating revenues – Expensestake their name from the type of asset consumed or service used. Cost of goods sold, sellingexpenses, marketing expenses, administrative expenses, interest expense, and incometaxes are common types of expenses. The related liabilities created include accounts payable,wages payable, interest payable, sales taxes payable, and income taxes payable

Front 9

Income statement

Back 9

Reports the success or failure of the company’s operations for a period of time.

Summarizes all revenue and expenses for period—month, quarter, or year.

If revenues exceed expenses, the result is a net income. If expenses exceed revenue, theresult is a (net loss).o Dividends are payments to the stockholders and are not expenses.o Amounts received from issuing stock or obtaining loans are not revenues.

Front 10

retained earning statement

Back 10

Reports the amount paid out in dividends and the amount of net income or net loss for a specificperiod of time. Shows changes in the retained earnings balance during period covered by statement. Ending retained earnings represents net income since the inception of the business that has notbeen paid out as dividends.