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Aoanan, Sedric Jed M.

1/10/12

BACNTHI/HBH

HW#1

4 Financial Statements
a. Income Statement - a company's financial statement that indicates how the revenue
(money received from the sale of products and services before expenses are taken out,
also known as the "top line") is transformed into the net income (the result after all
revenues and expenses have been accounted for,
also known as the "bottom line"). It displays the
revenues recognized for a specific period, and the
cost and expenses charged against these revenues,
including write-offs (e.g., depreciation and
amortization of various assets) and taxes. The
purpose of the income statement is to show
managers and investors whether the company made
or lost money during the period being reported.
b. Balance Sheet - a summary of the financial balances of a sole proprietorship, a
business partnership or a company. Assets, liabilities and ownership equity are listed as
of a specific date, such as the end of its financial
year. A balance sheet is often described as a
"snapshot of a company's financial condition".
Of the four basic financial statements, the
balance sheet is the only statement which
applies to a single point in time of a business'
calendar year. A standard company balance
sheet has three parts: assets, liabilities and
ownership equity. The main categories of assets are usually listed first and typically in
order of liquidity. Assets are followed by the liabilities. The difference between the assets
and the liabilities is known as equity or the net assets or the net worth or capital of the
company and according to the accounting equation, net worth must equal assets minus
liabilities.
c. Cash Flow Statement - financial statement that shows how changes in balance sheet
accounts and income affect cash and cash equivalents, and breaks the analysis down to
operating, investing, and financing activities. Essentially, the cash flow statement is
concerned with the flow of cash in and cash out of the business. The statement captures

both the current operating results and the


accompanying changes in the balance sheet. As
an analytical tool, the statement of cash flows is
useful in determining the short-term viability of a
company, particularly its ability to pay bills.
International Accounting Standard 7 (IAS 7) is
the International Accounting Standard that deals with cash flow statements.
d. Statement of Changes/Capital Statement - The statements explain the changes in a
company's retained earnings over the reporting period. They break down changes in the
owners' interest in the organization,
and in the application of retained profit
or surplus from one accounting period
to the next. Line items typically include
profits or losses from operations, dividends paid, issue or redemption of stock, and any
other items charged or credited to retained earnings.

Definition of Accounting/Accountancy
Accountancy it is a process of communicating financial information about a business entity to
users such as shareholders and managers. The communication is generally in the form of
financial statements that show in money terms the economic resources under the control of
management; the art lies in selecting the information that is relevant to the user and is reliable.
The principles of accountancy are applied to business entities in three divisions of practical art,
named accounting, bookkeeping, and auditing. It is also the art of recording, classifying, and
summarizing in a significant manner and in terms of money, transactions and events which are,
in part at least, of financial character, and interpreting the results thereof.
Legal forms of Business Organization
a. Sole Proprietorship - type of business entity that is owned and run by one individual
and in which there is no legal distinction between the owner and the business. The
owner receives all profits (subject to taxation specific to the business) and has unlimited
responsibility for all losses and debts. Every asset of the business is owned by the
proprietor and all debts of the business are the proprietor's. This means that the owner
has no less liability than if they were acting as an individual instead of as a business. It is
a "sole" proprietorship in contrast with partnerships.

Advantages: ability to raise capital either publicly or privately, to limit the personal liability of
the officers and managers, and to limit risk to investors
Disadvantages: Raising capital for a proprietorship is more difficult because an unrelated
investor has less peace of mind concerning the use and security of his or her investment
and the investment is more difficult to formalize; other types of business entities have more
documentation.

b. Partnership - an arrangement where parties agree to cooperate to advance their mutual


interests. It is a nominate contract between individuals who, in a spirit of cooperation,
agree to carry on an enterprise; contribute to it by combining property, knowledge or
activities; and share its profit. Partners may have a partnership agreement or declaration
of partnership and in some jurisdictions such agreements may be registered and
available for public inspection. In many countries, a partnership is also considered to be
a legal entity, although different legal systems reach different conclusions on this point.
Advantages: The biggest advantage of a general partnership is the tax benefit. Businesses
structured as partnerships do not pay income tax. Instead, all profits and losses are passed
through to the individual partners. The partnership still files a tax return stating the
business's profits and losses, but it does not pay taxes on the income. The partners must
also file tax returns that show their individual shares of the company's profits and losses -although partners are not treated as employees.
Disadvantages:

Legal liability: If you're not structuring your business as a corporation, realize that a
general partnership brings with it personal liability for all the business's obligations and
debts. If the company gets sued or hauled into bankruptcy court, all fines are the
responsibility of the individual partners. Also, most partnerships allow any partner or
owner in the company to make decisions on behalf of the company in general. Even if a
partner is acting on their own, all partners are responsible for the outcome of those

decisions.
Management issues: Because partners can make investments from their personal
finances and the money invested is then owned by all partners, it's easy for questions of
reimbursement to arise. What if one partner didn't want the company to take that money
and doesn't want the company to pay it back? The same kinds of issues can arise with

purchases for the company or even with decisions on which suppliers or clients to take
on. Having all partners equal in power and responsibility can cause problems unless
proper guidelines are set out.
c. Corporation - is created under the laws of a state as a separate legal entity that has
privileges and liabilities that are distinct from those of its members. There are many
different forms of corporations, most of which are used to conduct business. Early
corporations were established by charter (i.e. by an ad hoc act passed by a parliament
or legislature). Most jurisdictions now allow the creation of new corporations through
registration. An important (but not universal) contemporary feature of a corporation is
limited liability. If a corporation fails, shareholders may lose their investments, and
employees may lose their jobs, but neither will be liable for debts to the corporation's
creditors.
Advantages:
Limited liability for the owners. Since a corporation is a separate and distinct legal entity,
owners of a corporation are only indebted to the extent of their interest in the corporation. This
means that the creditors of a corporation can only run after the assets of the corporation and not
the personal assets of the stockholders in the settlement of the corporations debts and
obligations. In other words stockholders enjoy a shield from most creditors.
Ease on the sell and transfer. If the stock of a corporation is publicly traded, owners and
investors can sell their ownership interest in a corporation in a matter of minutes through a
stockbroker. If the stock is not publicly traded, the stock certificate can be transferred or
assigned to another owner by executing a deed of assignment of shares of stock.
Continuity. The corporations power of succession enables it to enjoy a continuous existence.
Unlike a sole proprietorship, the death of a stockholder will not terminate the corporation. The
corporation will continue as a separate and distinct legal entity and the shares of its interest can
be transferred from one owner to another owner.
Ease in raising money. Because of limited liability, ease of transfer of shares and continuity,
investors are more attracted to investing in corporations rather than in sole proprietorships and
partnerships. This attraction allows corporations to raise the capital needed to manage and
expand their operations.

Disadvantages:
Complexity in organization and regulation. To incorporate a business, an application with the
Securities and Exchange Commission must be filed and approved. A higher capital requirement
is also sometimes required for other type of corporations. Once approved, the corporation must
comply with the numbers of regulations and reportorial requirements which are specifically
implemented for corporations.

Double taxation. A possibility of double taxation may arise on the dividends it pays. The
corporation is taxed on its income. Then, if the corporation distributes some of the net income to
the stockholders as a dividend, the dividend will be taxed again on the stockholders personal
income tax returns.
Limited liability may weaken credit capacity. A corporation which doesnt have a good
financial condition and performance may drive away creditors specially that owners are enjoying
limited liabilities. This may weaken the corporations capacity to borrow money to expand its
operations.
Centralized management. Its centralized management restricts a more active participation by
stockholders who are not major owners in the conduct of corporate affairs.