(1) Uses of Accounting Information and the Financial Statements
a. Accounting as an Information System
i. Accounting is an information system that measures, processes, and communicates financial information about an economic entity. Accountants focus on the needs of decision makers. ii. External decision makers use financial accounting reports to evaluate how well a business has achieved its goals. These reports are called financial statements. iii. The primary external users of accounting information are investors and creditors. Users with indirect financial interests include, among others, tax authorities (IRS) and regulatory agencies (SEC).
b. The Corporate Form of Business
i. There are three basic forms of business:
1. Sole Proprietorship: One person is the owner, takes all the profits or losses of the business, and is liable for all of its obligations.
2. Partnership: Two or more owners (“partners”) share the profits and losses of the business according to a prearranged formula. Legally, there is no economic separation between the owners and the business. This unlimited liability of its partners is a key disadvantage of a partnership.
3. Corporation: A business unit chartered by the state that is legally separate from its owners (“stockholders”). Stockholders enjoy limited liability.
4. Limited Liability Company (MM addition):
c. The Financial Statements and their Elements
i. Income Statement
1. Many people consider the income statement (aka the “Statement of Operations”) to be the most important financial record because it shows whether a business achieved its Profitability goal though its operating activities.
2. [Revenues – Expenses = Net Income]
3. Elements
a. Revenues: Increases in stockholder’s equity resulting from business operations
b. Expenses: Decreases in stockholders’ equity resulting from operating expenses. Generally, a company