Week 1 Study Guide: Introduction to Financial Reporting
Readings and Key Terms
Ch. 1 of Accounting
Accounting
Annual report
Assets
Balance sheet
Expenses
Income statement
Liabilities
Net income or loss
Retained earnings statement
Revenue
Sarbanes-Oxley Act
Statement of cash flows
Stockholders’ equity
Ch. 2
Classified balance sheet
Using the financial statements
U.S. Securities and Exchange Commission website What do we do
Securities and Exchange Commission (SEC)
Securities Act of 1933
Securities Act of 1934
Content Overview
Forms of business organizations
Sole proprietorships
Form of organization wherein one person owns and runs the business
Benefits: Easy to set up, easy to manage, tax advantages, distribution of income is simple
Challenges: Unlimited liability, limited capital, lack of synergy Partnerships
Form of organization wherein two or more people own a company and agree to work as partners to finance and run the business
Benefits: Leadership synergy, simple to set up and dissolve, more access to capital
Challenges: Unlimited liability, each partner may be liable for decisions of others, cumbersome to transfer ownership
Corporations
Legal form of organization wherein one or more individuals register and organize under a state to operate as a separate legal entity; ownership often represented through the issuance of shares of stock
Benefits: Unlimited capital, limited liability, diverse leadership and corporate governance, easy to transfer ownership
Challenges: Dilution of ownership, double taxation of income if shared as dividends, larger organizations can be sluggish in responding to change
Financial statements
Income statement
Purpose: Designed to show the results of operations in terms of net income or net loss for a specific time period, such as a fiscal year, quarter, or month
Content: Two principle elements—revenues and expenses
Revenues: Increase in assets from sale of a product or service in the normal course of business; example: sales revenue
Expenses: Cost of assets consumed or services used in generating revenues; examples: cost of goods sold, purchases of merchandise, depreciation of assets, and selling expenses
Primary users:
Internal users: Owners, managers, board members, and employees
External users: Investors, creditors, and government regulators
Retained earnings statement
Purpose: Shows the distribution of income to owners through dividends and calculates the ending balance in retained earnings at the end of a fiscal time period
Content: Shows the beginning balance in retained earnings and itemizes all increases (primarily net income) and decreases (primarily dividends issued to owners and/or net losses)
Primary users:
Internal users: Owners, managers, board members, and employees
External users: Investors, creditors, and government regulators
Balance sheet
Purpose: Reports the financial condition of a company at a point in time, usually the last day of a fiscal year, quarter, or month; essentially, it shows the accounting equation: (Assets = Liabilities + Owner’s Equity) in a balanced format.
Content: Three principle elements—assets, liabilities, owner’s equity
Assets: Resourses owned by a business, such as cash, inventory, and fixed assets
Liabilities: Debts and obligations of a business, such as accounts payable
Owner’s equity: Owner’s claims to assets after liabilities are all paid; also called residual equity
