Financial Accounting 102A CH.1

Current liabilities

. Current liabilities are due within one year - accounts payable, salaries payable, short term notes payable, accrued liabilties

revenues and expenses on income statement

. Revenues and expenses are reported only on the income statement.

Corporation

A corporation is a business owned by the stockholders, or shareholders, who own stock representing shares of ownership in the corporation. One of the major advantages of doing business in the corporate form is the ability to raise large sums of capital from issuance of stock to the public. All types of entities (individuals, partnerships, corporations, or other types) may be shareholders in a corporation. Even though proprietorships and partnerships are more numerous, corporations transact much more business and are larger in terms of assets, income, and number of employees. A corporation is formed under state law. Unlike proprietorships and partnerships, a corporation is legally distinct from its owners. The corporation is like an artificial person and possesses many of the same rights that a person has. The most you can lose is your investment - they can't come to you for your personal assets.

Limited Liability company

A limited-liability company is one in which the business (and not the owner) is liable for the company's debts. An LLC may have one owner or many owners, called members. Unlike a proprietorship or a general partnership, the members of an LLC do not have unlimited liability for the LLC's debts. An LLC pays no business income tax. Instead, the LLC's income "flows through" to the members, and they pay income tax at their own tax rates, just as they would if they were partners. Today, many multiple-owner businesses are organized as LLC's, because members of an LLC effectively enjoy limited liability while still being taxed like members of a partnership.

Partnership

A partnership has two or more parties as co-owners, and each owner is a partner. Individuals, corporations, partnerships, or other types of entities can be partners. Income and loss of the partnership "flows through" to the partners, and they recognize it based on their agreed upon percentage interest in the business. The partnership is not a taxpaying entity. Instead, each partner takes a proportionate share of the entity's taxable income and pays tax according to that partner's individual or corporate rate. Partnerships are governed by agreement, usually spelled out in writing in the form of a contract between the partners. General partners are personally liable; limited partners are not.

Proprietorship

A proprietorship has a single owner, called the proprietor. Proprietorships tend to be small retail stores or solo providers of professional services—physicians, attorneys, or accountants. Legally, the business is the proprietor, and the proprietor is personally liable for all the debts. But for accounting purposes, a proprietorship is a distinct entity, separate from its proprietor. Thus, the business records should not include the proprietor's personal finances.

Professional Accounting guidelines

Accountants follow professional guidelines for measurement and disclosure of financial information. These are called Generally Accepted Accounting Principles (GAAP). In the United States, the Financial Accounting Standards Board (FASB) formulates GAAP. The International Accounting Standards Board (IASB) sets global—or international—financial reporting standards (IFRS). - All countries except Switzerland and United States use the IFRS.

Assets

Assets are items expected to have future benefit. Cash and cash equivalents Inventories Property, plant, and equipment

On exams, what should you assume as the accounting standards?

Assume we are using Generally Accepted Accounting Principles -GAAP

Who are the bosses for Corporate officers?

Board of directors

Investing activities.

Companies invest in long-term assets. A company buys fixtures and equipment, and when these assets wear out, the company sells them. Both purchases and sales of long-term assets are investing cash flows. Investing cash flows are the next most important after operations.

Financing activities

Companies need money for financing. Financing includes issuing stock, paying dividends, borrowing, and repayments of borrowed funds. The company may also pay loans and repurchase its own stock.

Corporations double taxation

Corporations pay business income tax and then shareholders are taxed on dividend distributions. Essentially, corporations are subject to double taxation. Ultimate control of a corporation rests with the stockholders, who generally get one vote for each share of stock they own. Stockholders elect the board of directors, which sets policy and appoints officers. The board elects a chairperson, who holds the most power in the corporation, often called the chief executive officer CEO. The board also appoints the president as chief operating officer (COO).

Current assets

Current assets are expected to be used, converted to cash, or sold within one business cycles - 90 days. - cash and cash equivalents, short-term investments, accounts receivable, prepaid expenses

Why does Apple company borrow money to pay dividends?

Currently, Apple holds a lot of its cash overseas since it gets taxed at a lower rate than if it were in the United States. If Apple brought the money back to the United States to pay the dividends, it would get taxed at an unfavorable rate. Plus, it's cheaper to borrow the money right now since the current interest rates are low.

Financial accounting

Financial accounting provides information for decision makers outside the entity, such as investors, creditors, government agencies, and the public. This information must be relevant for the needs of decision makers and must faithfully give an accurate picture of the entity's economic activities.

General partnership

General partnerships have mutual agency and unlimited liability, meaning that each partner may conduct business in the name of the entity and can make agreements that legally bind all partners without limit for the partnership's debts. Partnerships are therefore quite risky, because an irresponsible partner can create large debts for the other general partners without their knowledge or permission. This feature of general partnerships has spawned the creation of limited-liability partnerships (LLPs).

Business Ethical decision making

Good business requires decision making, which requires good judgement. Generally three factors influence business and accounting decisions. The economics factor recognizes that decisions should be made to maximize the economic benefits to the decision maker. The legal factor is based on the proposition that free societies are governed by laws. The ethical factor recognizes that even though a decision may be economically profitable and legal it still may not be the right thing to do. Ethics are shaped by our cultural, socioeconomic, and religious backgrounds. An ethical analysis is often needed to guide judgement during decision making.

Materiality

How relevant/important information is on a balance sheet. If there is $50 Billion dollar company, $1000 won't have an impact on the financial statement

Predictive value

I can look at the balance sheet and predict the quality of the service - if I see the plane cost is 100 but the accumulated depreciation is 99.9, then I can predict that the quality of the flight will be poor quality.

Continuity, going- concern assumption

In measuring and reporting accounting information, we assume that the entity will continue to operate long enough to use existing assets—land, buildings, equipment, and supplies—for its intended purposes. This is called the continuity (going-concern) assumption.

Order of financial statements

Income statement to statement of retained earnings to balance sheet to statement of cash flows

Why do individuals use accounting?

Individuals use accounting information to manage personal bank accounts, decide whether to rent an apartment or buy a house, and budget their monthly income and expenses

Why do investors use accounting?

Investors want to know how much income they can expect to earn on their investments

Liabilities

Liabilities are Debt. Accounts payable Income taxes payable Long-term debt

Long-term assets

Long-term assets are expected to benefit the company beyond the next business cycle. - property, plant, and equipment, long-term investments, intangible assets

Management accounting

Management accounting provides information for managers of a business. Examples of management accounting information include budgets, forecasts, and projections that are used in making strategic decisions of the entity. Internal information must still be accurate and relevant for the decision needs of managers.

Non-profits usage of raised money

Money must be 100% used towards the cause. Can't use money in ways not clearly laid out in the contract/agreement. If money raised for whales is used for the sharks, then the person will go to jail since the funds didn't actually go towards the whales.

Most important aspect on financial statments

Net income is the bottom line of the Income Statement. It is equal to revenues minus expenses. It is regarded as the single most important item on the financial statements.

Why do nonprofit organizations use accounting?

Nonprofit organizations such as churches, hospitals, and charities base many of their operating decisions on accounting data. They also have to file periodic reports with the IRS and government

Operating activities.

Operating activities. Companies operate by selling goods and services to customers. Operating activities result in net income or net loss, and they either increase or decrease cash. The income statement tells whether the company is profitable. The statement of cash flows reports whether operations increased the company's cash balances. Operating activities are most important, and they should be the company's main source of cash. Continuing negative cash flow from operations can lead to bankruptcy.

Two parts of stock holder's equity

Paid-in capital: the amount the stockholders have invested in the corporation Retained earnings: the amount earned by income-producing activities and kept for use in the business

Why do regulatory bodies use accounting?

Regulatory bodies that use accounting information include the IRS, state and local governments, the SEC, and many more.

Retained earnings

Retained earnings is the portion of net income that the company has kept over the years and reinvested into the business. Net income increases retained earnings, while net losses and dividends decrease retained earnings. A positive retained earnings indicates that the business has been able to accumulate earnings and expand overtime. Beginning retained earnings plus or minus net income (minus if lost) minus dividends declared equals ending retained earnings

Revenues, expenses, and dividends

Revenues are inflows of resources that increase retained earnings by delivering goods or services to customers. Expenses are outflows of resources that decrease retained earnings due to operations. Expenses represent the cost of doing business. Dividends are distributions to the stockholders and decrease retained earnings. Dividends are not expenses and do not affect net income.

The American Institute of Certified Public Accountants (AICPA)

The American Institute of Certified Public Accountants (AICPA) provides the industry a Code of Professional Conduct with these principles: Responsibilities Public Interest Integrity Objectivity and Independence Due Care Scope and Nature of Services

Statement of cash flows

The Statement of Cash Flows is the fourth and final financial statement. It measures cash receipts and cash payments. Companies engage in three basic types of activities.

balance sheet

The balance sheet, or statement of financial position, reflects a company's position at a certain time. It reports assets, liabilities, and stockholders' equity.

Stockholder's equity or stockholder's ownership

The equity section represents the stockholders' ownership of the business's assets. In a corporation, it is referred to as stockholders' equity. In a sole proprietorship, it is referred to as owner's equity. Examples- common stock, additional paid-in capital, retained earnings, treasury stock, accumulated other comprehensive income (loss)

Accounting equation

The financial statements are based on the accounting equation. The equation presents the resources of a company and the claims to those resources. Assets are on the right and must equal the Liabilities & Owners' Equity on the left side.

Variables of accounting equation

The financial statements are based on the accounting equation. The equation presents the resources of the company (assets) and the claims to those resources (liabilities and owners' equity). Assets: economic resources that are expected to produce a future benefit. Liabilities: "outsider claims." Include debts, payables, and loans. Owners' equity: "insider claims." Equity means ownership. For example, it is the stockholders' interest in the assets of a corporation.

Historical cost principle.

The historical cost principle states that assets should be recorded at their actual cost, measured on the date of purchase as the amount of cash paid plus the dollar value of all non-cash consideration (other assets, privileges, or rights) also given in exchange. The historical cost principle is not used as pervasively in the United States as it once was. Accounting is moving in the direction of reporting more and more assets and liabilities at their fair values. Fair value is the amount that the business could sell the asset for, or the amount that the business could pay to settle the liability.

Entity assumption

The most basic accounting assumption is the entity, which is any organization that stands apart as a separate economic unit. Sharp boundaries are drawn around each entity so as not to confuse its affairs with those of others.

Accounting data

The overall objective of accounting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity. -To be useful, information must have relevance and be faithfully represented. Accounting must also have the enhancing qualities of comparability, verifiability, timeliness, and understandability. The costs of disclosure should not exceed the benefits to users.

Stable monetary unit assumption.

Under the stable monetary unit assumption, accountants assume that the dollar's purchasing power is stable over time.

Accounts payable

When you purchase things on credit . Anything longer than 1 year is long term debt.

Why do creditors use accounting?

creditors are interested in when and how they will be paid back.

Long term liabilities

debts payable after one year - longterm notes payable, long term bonds payable

Limited liability partnership

limited-liability partnership is one in which a wayward partner cannot create a large liability for the other partners. In LLPs, each partner is liable for partnership debts only up to the extent of his or her investment in the partnership, plus his or her proportionate share of the liabilities. Each LLP, however, must have one general partner with unlimited liability for all partnership debts.

Two parts of a corporation's equity, or stockholder's equity

paid in capital and retained earnings

How well did the company perform during the year

recorded on income statement. revenue minus expense equals net income or net losee

how much cash did the company generate and spend during the year?

recorded on statement of cash flows. operating cash flows plus or minus investing cash flows, plus or minus financing cash flows equals increase or decrease in cash.

why did the company's retained earnings change during the year

recorded on statement of retained earnings. Beginning retained earnings plus net income or minus net loss, minus dividends declared, equals ending retained earnings

what is the company's financial position at year end?

recorded on the balance sheet. Assets equals liabilities plus owner's equity