ACG2021
CoMPLETE
TESt 1 sTUDY gUIDE
chapter 1
Business: What’s It all about
Purpose of a business (LO 1)
I.
A
business is formed to provide goods or services for the purpose of making a
profit for its owner or owners
II.
To
start a business you need capital
a. Capital comes from investors
(owners)
b. Capital comes from creditors
(lenders)
III.
Businesses
can be classified as a for-profit
organization (enterprise) or a not-for-profit
organization (formed solely to help people)
The nature of business operations (LO 1)
I.
The
operation of the business depends on what it is organized to do.
II.
There
are four types of businesses
a. Service organization – provides services (does something
for you) rather than selling something
i.
Law firm, doctor’s office, etc.
b. Merchandising business – buys goods, adds value to them,
then sells them to customers
i.
Wholesale
merchandiser – buys goods, adds value, then sells them to other companies
1. Sam’s Club, Cosco
– the middleman
ii.
Retail
merchandiser – buys goods, adds value, then sells them to “final consumers”
1. Gap, Best Buy
c. Manufacturer – makes the products it sells
i.
Ford Motor Company
d. Financial services company – doesn’t make tangible products
and doesn’t sell products made by other companies; deals in services related to
money
i.
Stock brokers
Ownership structure of a business (LO 1)
I.
Business
ownership usually takes one of three forms
a. Sole proprietorships (Mom and Pop)
i.
Single
person owns the business
ii.
Not
separate from its owner in terms of responsibility and liability
iii.
The
business is the owner and the owner is the business
b. Partnerships
i.
Owned
by two or more people
ii.
Similar
to a sole proprietorship
iii.
Not
separate from the owners in terms of responsibility and liability
c. Corporations
i.
Legally separate and financially
separate from the owners
ii.
Ownership
in a corporation is divided into units called shares of capital stock
iii.
Owners
are called shareholders or stockholders
iv.
Corporations
are separate legal entities
Overview of the financial statements (LO 4)
What
is the purpose of accounting?
To provide
financial information for decision makers within (e.g. managers) and outside
(e.g. stockholders, lenders) an organization
Financial accounting (primarily
for external decision making):
Useful to parties
outside of an organization
Generally Accepted
Accounting Principles (GAAP) – The rules for preparing the financial statements i.e.
Income Statement, Statement of Owner’s Equity, Balance Sheet, and Cash flow
statement).
Useful for easy
comparisons for decision making
Financial Accounting
Standards Board (FASB) – The group that is responsible for establishing the rules.
Four
basic financial statements
I.
Balance sheet (“the accounting equation)”
Assets = Liabilities + Owners’ Equity (A = L + OE)
Assets = Liabilities + Contributed Capital + Retained
Earnings
a. Describes the financial
position of the company at a specific point in time (Snapshot in time)
b. Assets
i.
Things
of value owned by a business
ii.
Provide
future benefit
iii.
Examples:
cash, property, machinery, or anything else that helps a company generate cash
flow
c. Liabilities
i.
Claims
to the assets by creditors
ii.
Amounts
owed to those who have loaned to the company
iii.
Examples:
amount owed to creditors (creditors have claim to assets if liabilities aren’t
paid)
d. Owners’ equity (stockholders’ equity
or shareholders’ equity)
i.
Claims
to the assets by the owners
ii.
Also
called net assets (Assets – Liabilities)
iii.
Composed
of Contributed Capital + Retained Earnings
II.
Income statement
Revenues – Expenses = Net Income
Revenue = what a company receives
from providing goods and services to customers
Expense = what a company incurs
from providing goods and services to customers
a. Contains summary of all revenues and
expenses for a period of time (fiscal period)
b. Difference between revenues and
expenses is called net income, profit or net earnings
c. Format of the income statement
III.
Statement of changes in owners’ equity
Contributed Capital + Retained Earnings
(additions + subtractions) + (Beg
RE + Net Income – Dividends)
a. Shows changes that took place in
owners’ equity during a period of time
b. Contributed capital (What owners
contribute to the business)
i.
Additions
– additional investment
ii.
Deductions
– not covered in this course
c. Retained earnings (Earnings that are
retained in the business)
i.
End
RE = Beg RE + Revenue – Expenses - Dividends
ii.
Additions
– net income
iii.
Deductions
– dividends
1. Dividends are assets that a company
pays out to the owners of a business
d. Statement of changes in owners’
equity is the bridge from the income statement to the balance sheet (hybrid)
IV.
Statement of cash flows
Operating + Investing + Financing
“O – I – F”
a. Shows all cash receipts and cash
disbursements during a period of time
b. Cash from OPERATING activities
i.
Inflows
– cash received from customers
ii.
Outflows
– cash routinely paid to produce and sell goods and services