ACG-2021 Lecture Notes - Lecture 1: Healthsouth, Sole Proprietorship, Double Taxation

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26 Oct 2016
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Intro to Financial Accounting Notes 1
Chapter 1 - Intro to Financial Statements
Forms of Business Organization
-Sole Proprietorship
-Simple to establish
-Owner controlled
-Tax advantages
-Corporation
-Easier to transfer ownership
-Easier to raise funds
-No personal liability
-Partnership
-Simple to establish
-Shared control
-Broader skills and resources
-Tax advantages
-A corporation is an incorporated business entity that has filed articles of incorporation in a
state of domicile.
-Can attract large amounts of capital investment
-Allows for an easy transfer of ownership
-Can attract professional management
-Provides stockholders with limited liability
-Survives the death of its owner(s) (continuity of life)
-Corporations are subject to more gov’t regulations
-Shareholders can have difficulty knowing whether management is making decisions in
shareholders’ best interests
-Corporations are subject to income taxation (Double taxation)
Accounting- Accounting is the information system that identifies, records, and communicates the
economic events of an organization to interested users.
Users can be divided into 2 groups:
- Internal
- External
The purpose of accounting, and in particular financial accounting, is to provide economic info as
inputs for decision making by users of the info.
Users and Uses of Financial Info
Internal Users
-Finance
-Marketing
-Human Resources
-Management
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External
-Investors
-Creditors
Ethics in Financial Reporting
US regulators and lawmakers were very concerned that the economy would suffer if investors
lost confidence in corporate accounting because of unethical financial reporting.
-Recent financial scandals include: Enron, WorldCom, HealthSouth, AIG
-Congress passed Sarbanes-Oxley Act of 2002
-Top management must now certify the accuracy of financial information
-Penalties for fraudulent activity was increased
-Independence of auditors was increased
-Increased oversight by the board of directors must occur, including the board’s selection
and supervision of the independent auditor
All businesses are involved in three types of activity —
1. Financing
2. Investing
3. Operating
The accounting info system keeps track of the results of each of these business activities
Business Activities
Financing Activities
-Two primary sources of outside funds are:
1. Borrowing money (debt financing)
- Amounts owed are called liabilities
- Party to whom amounts are owed are creditors
- Notes payable and bonds payable are different types of liabilities
- Notes are sooner term than bonds
- Bonds are a longer term liability
- Both carry interest charges
- Accounts liabilities typically do not have interest charges
2. Issuing (selling) shares of stock for cash.
- Payments to stockholders are called dividends.
-Debt financing and equity financing
Investing Activities
-Purchase of resources a company needs to operate.
-Computers, delivery trucks, furniture, buildings, etc. (property, plant, and equipment)
-Resources owned by a business are called assets.
-Investments are another example of an investing activity.
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