Chapter 1, Problem 1.1APCP

Great Adventures

  (The Great Adventures problem continues in each chapter.)

Tony Matheson plans to graduate from college in May 2018 after spending four years earning a degree in sports and recreation management. Since beginning T-ball at age five, he’s been actively involved in sports and enjoys the outdoors. Each summer growing up, he and his father would spend two weeks at a father/son outdoor camp. These fond memories are part of the reason he chose his major. He wants to remain involved in these outdoor activities and provide others with the same adventures he was able to share with his dad. He decides to start an outdoor adventure company. However, he’s not sure he has the business background necessary to do this.

  This is where Suzie Ramos can help. Suzie also plans to graduate in May 2018 with a major in business. Suzie and Tony first met their sophomore year and have been friends ever since as they share a strong interest in sports and outdoor activities.

  They decide to name their company Great Adventures. They will provide clinics for a variety of outdoor activities such as kayaking, mountain biking, rock climbing, wilderness survival techniques, orienteering, backpacking, and other adventure sports.

  Required:

  1.    What are the three primary forms of business organizations Tony and Suzie might choose for Great Adventures? Explain the advantages and disadvantages of each. Which form do you recommend for Great Adventures?

  2.    Discuss some of the typical financing, investing, and operating activities that a company like Great Adventures is likely to have.

  3.    What specific account names for assets, liabilities, stockholders’ equity, revenues, and expenses would the company likely use to record its business transactions?

  4.    To report company performance, Suzie plans to prepare the four primary financial statements. Explain the type of information provided by each statement.

To determine

To identify: The three major legal forms of business organizations.

Answer to Problem 1.1APCP

The three major legal forms of business organizations are:

• Sole Proprietorship
• Partnership
• Corporation

Explanation of Solution

Business Organizations

Business organizations are individuals or group of individuals formed together to carry out sale and purchase of goods and services with the aim of earning profits, maximizing wealth and to achieve other organizational objectives.

Sole Proprietorship:  It is a type of business organization in which an individual manages and carries out the entire business activities on their own. The individual is entitled to all the profits earned and is responsible for all the losses incurred, while carrying out those operations.

Partnership: Partnership firms are started by two or more individuals joining together. This form of partnership is very easy to establish and there is a shared control. The duties and formalities of the concern are formalized by making a partnership agreement. In this type of company, individuals with similar interest join together and startup a business. As previously stated for sole proprietorship, partnership firms too enjoy tax advantages.

Corporation: It is an organization which is a separate legal entity from its owners. It has a perpetual succession and holds a limited liability. In a corporation, each individual holds a certain percentage of ownership which is termed as share/stock, collectively known as share capital or stockholders equity.

To determine

Advantages and disadvantages of a business being formed as a corporation.

Answer to Problem 1.1APCP

The following table shows the advantages and disadvantages of each form of legal business organization.

Legal form of business	Advantages of a business being a corporation	Disadvantages of a business being a corporation
Sole proprietorship	Low tax rates	Limited resources, unlimited liability and insufficient funds
Partnership	Low tax rates	Limited resources, shared but not limited liability and insufficient funds
Corporation	Limited liability, Easy transferability of ownership  and Easier way to raise funds for business	High tax rate and Government regulations

Explanation of Solution

Business Organizations

Business organizations are individuals or group of individuals formed together to carry out sale and purchase of goods and services with the aim of earning profits, maximizing wealth and to achieve other organizational objectives.

Sole proprietorship:

• Advantages:

1. 1. The tax rates are low.
   2. It is easy to setup sole proprietorship as there are few or no regulations.

• Disadvantages:

1. 1. The resources to carry out the business operations are limited.
   2. There is a shortage of funds.
   3. The owner is held personally responsible for the losses and debt.
   4. Only a small scale business is possible.

Partnership:

• Advantages:

1. 1. The tax rates are low.
   2. It is easy to setup partnership as there are minimal regulations.

• Disadvantages:

1. 1. The resources to carry out the business operations are limited.
   2. There is a shortage of funds.
   3. The partners are held personally responsible for the losses and debt.
   4. It is difficult to set up large-scale business.

Corporation:

• Advantages:

1. 1. Stockholders’ of a business are not personally liable for the business debts and legal obligations.
   2. It is easy to sell the corporation stocks in the open market, and raise funds for the corporation.
   3. Large-scale business operations are feasible.

• Disadvantages:

1. 1. They have to pay higher taxes than sole proprietorship or partnership.
   2. It is difficult to establish a corporation than sole proprietorship or partnership, as a business needs to come across more regulations to form a corporation.

To determine

To identify: The most chosen largest form of business companies.

Answer to Problem 1.1APCP

The most chosen largest form of business companies is Corporation.

Explanation of Solution

Corporation: It is an organization which is a separate legal entity from its owners. It has a perpetual succession and holds a limited liability. In a corporation, each individual holds a certain percentage of ownership which is termed as share/stock, collectively known as share capital or stockholders equity.

Corporation is most chosen largest form of business companies, as it provides limited liability which means that stockholders’ of a business are not personally liable for the business debts and legal obligations. In corporation, it is easy to sell the corporation stocks in the open market, and raise funds. Large-scale business operations are feasible.

To determine

To identify: The typical financing, investing and operating activities G Adventures is likely to have.

Explanation of Solution

Financing activities: Financing activities refer to the activities carried out by a company to mobilize funds to carry out the business activities. The examples for financing activities are purchase of bonds, issuance of common shares, and others.

The typical financing activities G Adventures is likely to have are:

• Issuing Common stock;
• Borrowing funds from the bank.

Investing activities: Investing activities refer to the activities carried out by a company for acquisition of long term assets. The examples for investing activities are purchase of equipment, long term investment, sale of land, and others.

The typical investing activities G Adventures is likely to have are:

• Purchase of equipment, machinery;
• Purchase of trekking vehicles;
• Purchase of office building.

Operating activities: Operating activities refer to the normal activities of a company to carry out the business. The examples for operating activities are purchase of inventory, payment of salary, sales, and others.

The typical operating activities G Adventures is likely to have are:

• Collection of fees for the service provided;
• Purchase of utilities;
• Payment of rent, salaries, insurance and taxes.

To determine

To identify: The specific account names for assets, liabilities and stockholder's equity, revenue and expenses G Adventures is likely to have.

Explanation of Solution

Asset: Assets refer to the resources owned by the business, which are utilized in the course of the business to generate revenue.

The specific account names for assets G Adventures is likely to have are:

• Cash;
• Equipment;
• Accounts receivable;
• Supplies.

Liability: Liabilities include the claims of the creditors on the assets of the business. The liability is the obligation of the business.

The specific account names for liabilities G Adventures is likely to have are:

• Salaries payable;
• Accounts payable;
• Notes payable.

Stockholder’s equity: Stockholder’s equity refers to the right the owner possesses over the resources of the business. Revenues and the expenses are the components of the owner’s equity.

The specific account names for stockholder's equity G Adventures is likely to have are:

• Common stock;
• Retained earnings.

Revenues: Revenue refers to the income received from the business activity or sale of the output, during the accounting period.

The specific account names for revenues G Adventures is likely to have are:

• Service revenues.

Expenses: Expenses refer to the cost incurred on the necessary purchases of the fixed assets by the firm, or the production of the goods and services, during the accounting period.

The specific account names for expenses G Adventures is likely to have are:

• Salaries;
• Utilities;
• Rent
• Insurance;
• Taxes.

To determine

To Explain: The type of information provided by each of the financial statement.

Explanation of Solution

Financial statements: Financial statements refer to those statements, which are prepared by the Company according to particular formats in accounting to show its financial position.

Financial statements include the following statements:

• Cash flow statement
• Income statement
• Balance sheet
• Statement of stockholder's equity

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Statement of stockholder's equity: This statement reports the beginning stockholder's equity and all the changes which led to ending stockholder's equity. Additional capital, net income from income statement is added to and drawings or dividends are deducted from beginning stockholder's equity to arrive at the end result, closing balance of stockholder's equity.

Statement of cash flows: This statement reports all the cash transactions which are responsible for inflow and outflow of cash, and result of these transactions is reported as ending balance of cash at the end of reported period.

Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.