The Big Picture…
BUS 2101
Decision Making
Financial Information
Financial Statement Analysis
Financial Statements
GAAP
Annual Reports
Management Discussion
Income Statement
Statement of Cash Flow
Balance Sheet
Statement of Retained Earnings
Notes
Auditor’s Report
Business Activities
Users
Operating
External
Investing
Internal
Financing
FORMS OF BUSINESS ORGANIZATIONS
LEGAL FORMS OF BUSINESS ORGANIZATION
SOLE PROPRIETORSHIP
ONE OWNER
PARTNERSHIPS
CORPORATIONS
> ONE OWNER
Can a
partnership
have 500
owners?
Can a
corporation
have one
owner?
Does every business
have a choice of legal
form?
ADVANTAGES OF FORMS OF BUSINESS ORGANIZATIONS
ADVANTAGES
SOLE PROPRIETORSHIP
EASY
INEXPENSIVE
NO DOUBLE TAXATION
RETAIN ALL PROFITS AFTER TAX
ADVANTAGES OF FORMS OF BUSINESS ORGANIZATIONS
ADVANTAGES
PARTNERSHIPS
COMBINE CAPITAL
COMPLIMENTARY TALENTS
NO DOUBLE TAXATION
EASY???
ADVANTAGES OF FORMS OF BUSINESS ORGANIZATIONS
ADVANTAGES
CORPORATIONS
LIMITED LIABILITY
TRANSFERABILITY
ABILITY TO RAISE CAPITAL
DISADVANTAGES OF FORMS OF BUSINESS ORGANIZATIONS
DISADVANTAGES
SOLE PROPRIETORSHIP
UNLIMITED LAIBILITY
DIFFICULT TO RAISE CAPITAL
DISADVANTAGES OF FORMS OF BUSINESS ORGANIZATIONS
DISADVANTAGES
PARTNERSHIPS
UNLIMITED LAIBILITY
DIVISION OF PROFITS
MUTUAL AGENCY
EASY???
DISADVANTAGES OF FORMS OF BUSINESS ORGANIZATIONS
DISADVANTAGES
CORPORATIONS
DOUBLE TAXATION
Not paying dividends would eliminate double taxation…
WHY LARGE BUSINESSES USE THE CORPORATE FORM
CORPORATONS
Advantages
Limited Liability
Transferability
Ability to Raise Capital
Disadvantages
Double Taxation
Business Activities
CASH FLOW FROM:
OPERATIONS
INVESTING
FINANCING
Financial Statements
•
•
•
•
Income statement
Statement of retained earnings
Statement of cash flows
Balance sheet
Income Statement
• For the period ending…
Revenue
$ 100
- Expenses
80
= Net Income
20
Statement of Retained Earnings
Q. 9
• As of …
Beginning retained earnings
(earnings not paid to owners)
+ Net Income
- Dividends
$ 110
$ 20
15
(earnings paid to owners)
= Ending retained earnings
(not equal to cash)
115
Slow
growt
h
Statement of Cash Flows
Q. 12
• For the period ending …
Beginning cash
$ 10
+ Cash flow from operations
90
(not same as Net Income)
- Cash flow from investments
20
+/- Cash flow from financing
-50
= Ending cash
30
Balance Sheet
• As of …
Assets
$ 500
(what we own)
= Liabilities
400
(what we owe)
+ Equity
(what’s left over)
100
$ 500
Interrelationship of Financial
Statements
Retained Earnings
(Balance Sheet)
Net Income
(Income Statement)
Retained Earnings
(Statement of Retained Earnings)
Internal and External Users of
Financial Information
Internal
Who???
Management
External
Stockholders
and creditors
Level of detail
Detailed
Summary
Perspective
Future
Past
Rules
No rules
GAAP
Annual Report
• Filed by all publicly traded companies
• Financial statements
• Management discussion and analysis
– Here’s our excuses…
• Notes to financials
– Here’s how we did this…
• Auditor’s report (Page 21)
– Company followed the rules…
– Credibility???
Q. 18 20
Accounting Principles (GAAP)
• SEC had deferred to accounting profession
in past. Self-regulated.
• FASB: GAAP should create useful
information
• Enron, WorldCom, Tyco may ring a bell
• RiteAid, Cendant, etc. may not
Accounting Principles
• Historical cost principle:
– Assets are recorded at their cost
– Not fair market value
• Why?
– How would you determine “value”?
– When do you know the value of an asset?
Accounting Principles
• Full Disclosure
– If the financial statements don’t tell the whole
story…
• Stock options we gave to execs
• Lawsuit over customers we’ve sent to the hospital
– Disclose it in the notes to the financial
statements
Tootsie Roll’s Financial Statements
• Pages 19 - 24
The Big Picture…
BUS 2101
Decision Making
Financial Information
Financial Statement Analysis
Financial Statements
GAAP
Annual Reports
Management Discussion
Income Statement
Statement of Cash Flow
Balance Sheet
Statement of Retained Earnings
Notes
Auditor’s Report
Business Activities
Users
Operating
External
Investing
Internal
Financing