Chapter 1 (Pages 1-20)

Sole Proprietorship- a business owned by one person. It is simple to

set up and gives you control over the business. Small owneroperated businesses such as barber shops, law offices and auto repair
shops are often sole proprietorships as are farms and small retail
stores.
Simple to establish
Owner controlled
Tax advantages
Liable for all debts and legal obligation
(receive more favorable tax treatment than a corporation)
Partnership- a business owned by two or more persons associated as
partners. Partnerships often are formed because one individual does
not have enough economic resources to initiate or expand the
business. Sometimes partners bring unique skills or resources to
the partnership. Retail and secive type businesses including
professional practices (lawyers, doctors) often organize as
partnerships.
Simple to establish
Shared control
Broader skills and resources
Tax advantages
Liable for all debts and legal obligation
(receive more favorable tax treatment than a corporation)
Corporation- a business organized as a separate legal entity owned by
stockholders. Investors in a corporation receive shares of stock to
indicate their ownership claim. Buying stock in corporation is more
attractive than investing in a partnership because shares of stock are
easier to sell. Individuales can become stockholders by investing
relatively small amounts of money. Therefore it is easier for
corporations to raise funds.
Easier to transfer ownership
Easier to raise funds
No personal liability
Pay higher taxes but have no personal legal liability
Hybrid Business Forms- LLCs are the most popular types and they are
limited liability companies and subchapter S corporations.

Accounting- is the information system that identifies records and

communicates the economic events of an organization to interested
users. Users of accounting information can be divided broadly into two
groups: internal users and external users.
Internal Users- managers who plan, organize, and run a business.
These include marketing managers, production supervisors,
finance directors and company officers. Managers must answer
questions regarding finance, marketing, human resources and
management.
External Users- there are several types of external users. Investors
use accounting information to make decisions to buy, hold, or sell
stock. Creditors such as suppliers and bankers use accounting
information to evaluate the risks of selling on credit or lending money.
Some questions investors and creditors may ask a company are- is the
company earning money? How does it size compare to its profit? Will it
be able to pay its debts as they come due?
Tax Authorities want to know whether the company complies with
tax laws. Customers are interested in whether a company will
continue to honor product warranties and otherwise support its product
lines. Labor Unions want to know if owners can pay their workers.
All business are involved in financing, investing, and operating.
The Accounting Information System- keeps track of the results of each
of the various business activities- financing, investing, and operating.
Financing Activities- the two primary sources of outside funds for
corporations are borrowing money (debt financing) and issuing (selling)
shares of stock in exchange for cash (equity financing). Companies can
borrow money in many different ways. They can get a loan from the
bank or borrow directly from investors by issuing debt securities called
bonds. The people the company owes money to are its creditors. The
form of debt and other obligations owed to the creditors are called
liabilities. Bonds payable are debt securities sold to investors that
must be repaid at a particular date some years in the future.
Corporations also obtain funds by selling shares of stock to
investors. Common stock is the term used to describe the total
amount paid in by stockholders for the shares they purchase. If you
loan money to a company you are one of their creditors. Dividends
are cash payments to stockholders from a company on a regular basis
as long as there is sufficient cash to cover required payments to
creditors.

Investing Activities- involve the purchases of the resources a

company needs in order to operate. A growing company purchases
many resources many resources. Resources owned by a business are
called assets. Cash is an important asset to businesses because it
allows them the opportunity to invest it in securities (stocks or bonds)
of other corporations. Investments are another example of an
investing activity.
Operating Activities- Revenue is the increase in assets or decrease in
liabilities resulting from the sale of goods or the performance of
services in the normal course of business. Sources of revenue common
to many businesses are sales revenue, service revenue, and
interest revenue. Supplies assets used in day to day operations.
Inventory are goods available for future sales to customers are
assets. Account receivable the right to receive money in the future
from a customer. Expenses the cost of assets consumed or services
used in the process of generating revenues. Keeping track of expensescost of goods sold (the cost of ingredients), selling expenses (the
cost of sales person salaries), administrative expenses (the salaries
of the administrative staff), interest expense (amounts of interest
paid on various debts), and income taxes (corporate taxes paid to the
government).
Communicating with Users- Use financial statements to show account
information. Income statement shows how successfully your
business performed during a period of time, you report its revenues
and expenses (list revenues list expenses = net income or loss).
Retained Earnings Statement indicates how much of previous
income was distributed to you and the other owners of your business in
the form of dividends and how much was retained in the business to
allow for future growth (net income dividends = retained earning).
Balance Sheet presents a picture at a point in time of what your
business owns (its assets) and what it owes (its liability) (Assets =
liabilities + stockholders Equity). Statement of Cast Flow shows
where your business obtained cash during a period of time and how
that cash was used.
Past incomes can help predict future incomes.

Chapter 2 Pages 46-53

Classified Balance Sheet- groups together similar assets and similar
liabilities, using a number of standard classifications and sections. This
is useful because items within a group have similar economic
characteristics.
Current Assets- are assets that a company expects to convert to cash
or use up within one year or its operating cycle, whichever is longer.
Common types of current assets are- cash, investments (short term U.S
government securities), receivable (accounts receivable, notes
receivable, and interest receivable), inventories, and prepaid expenses
(insurance and supplies). Companies list current assts in the order in
which they expect to convert them into cash.
Operating Cycle- the average time required to go from cash to cash
in producing revenueto purchase inventory, sell it on account, and
then collect cash from customers. For most businesses this cycle takes
less than a year.
Long-term Investments- are generally, investments in stocks and
bonds of other corporations that are held for more than one year, longterm assets such as land or buildings that a company is not currently
using in its operating activities, and long-term notes receivable.
Property, plant, equipment- are assets with relatively long useful
lives that are currently used in operating the business. This category
includes land, buildings, equipment, delivery vehicles, and furniture.

Description- is the allocation of the cost of an asset to a number of

years. Companies do this by systematically assigning a portion of an
assets cost as an expense each year.
Accumulated depreciation account- shows the total amount of
depreciation that the company has expensed thus far in the assets
life.
Intangible Assets- assets that do not have physical substance and
yet often are very valuable.
Current Liabilities- obligations that the company is to pay within the
next year or operating cycle, whichever is longer. Examples are
accounts payable, salaries and wages payable, notes payable, interest
payable, and income taxes payable. Also included in current liabilities
are current maturities of long-term obligationspayments to be made
within the next year on long-term obligations.
Long-term liabilities (long-term debt)- are obligations that a
company expects to pay after one year. Liabilities in this category
include bonds payable, mortgages payable, long-term notes payable,
lease liabilities, and pension liabilities.
Stockholder Equity- consists of two parts: common stock and
retained earnings. Companies record as common stock the
investments of assets into the business by the stockholders. They
record as retained earnings the income retained for use in the
business, These two parts, combined, make up stockholders equity on
the balance sheet.