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Final Review - Primary forms of business organization Sole...

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Primary forms of business organization Sole proprietorship Partnership Corporation Sole proprietorship Advantages: simple to establish, owner controlled, tax advantages Disadvantages: personal liability, financing may be difficult, transfer of ownership may be difficult Partnership Advantages: simple to establish, shared control, tax advantages, broader skills and resources Disadvantages: partners personally liable, transfer of ownership may be difficult Corporation Advantages: easy to transfer ownership, greater capital raising potential, lower legal liability Disadvantages: unfavorable tax treatment Users of financial information Internal- users within organization such as management External- users outside the organization such as investors and creditors SOX 1. Top management certify accuracy of financial information 2. Severe penalties for fraudulent activity 3. Increased independence of auditors 4. Increased responsibility for board directors Financing Activity Borrow from creditors (notes payable and bonds payble) Selling stock (common stock and dividends) Investing Activity Land, building, equipment, cash, investments in debt or equity of another company Operating Activities Revenues Expenses Net income/Net Loss Stockholder’s Equity Ownership claim on assets Basic Accounting Equation Assets= Liabilities + Stockholder’s Equity How do all the financial statements connect? Income statement provides net income/net loss>>>Add net income to beginning retained earnings>>>retained earnings is included in stockholders’ equity on the balance sheet>>>the cash from the balance sheet is shown as the cash at end of period
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on the statement of cash flows Notes to Financial Statements 1. Clarify information presented in the financial statements 2. Describe the accounting policies or explain uncertainties and contingencies Auditors Report Does an independent examination of the financial accounting data presented by a company. Provide an “unqualified opinion” Income Statement Reports success or failure of the company’s operations during the period of the statement Shows net income or net loss Retained Earnings Statement Indicates mound paid out in dividends Shows change over the period Same period as income statement Balance Sheet Shows relationship between assets, liabilities, and stockholders’ equity at a particular date Statement of Cash Flows Reports the cash effects of a company’s operations and investing for a period of time. Sierra Corporation Income Statement For the Month Ended October 31, 2010 Revenues Service Revenue $10,6000 Expenses Salaries Expense $5,200 Supplies Expense $1,500 Rent Expense $900 Insurance Expense $50 Interest Expense $50 Depreciation Expense $40 Total Expense $7,740 Net Income $2,860 Sierra Corporation Retained Earnings Statement For the Month Ended October 31, 2010
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Retained Earnings, October 1 $0 Add: Net Income $2,860 $2,860 Less: Dividends $500 Retained Earnings, October 31 $2,360 Sierra Corporation Balance Sheet October 31, 2010 Assets Cash $15,200 Accounts Receivable $200 Advertising Supplies $1,000 Prepaid Insurance $550
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