Accounting for Non-accounting Majors-Chapter 1 Role of Accounting in Business

Types of Stakeholders

1. Capital market stakeholders 2. Product or service market stakeholders 3. Government stakeholders 4. Internal stakeholders

Stockholders' Equity List of Items

1. Captial Stock 2. Retained Earnings 3. Repurchased capital stock and other equity items

Forms of Business

1. Proprietorship 2. Partnership 3. Corporation 4. Limited Liability Company (LLC)

Accounting Equation

Assets=Liabilities + Stockholders' Equity

Stockholders

Investors who purchase stock in a corporation.

Owners' equity

The financial rights of the owner.

Objective of businesses

To earn a profit by providing goods or services to customers.

Liabilities List of Items

1. Accounts payable 2. Accured liabilities 3. Notes and other debt 4. Income taxes payable

Eight Accounting Concepts

1. Business Entity Concept 2. Cost Concept 3. Going Concern Concept 4. Matching Concept 5. Objectivity Concept 6. Unit of Measure Concept 7. Adequate Disclosure Concept 8. Accounting Period Concept

Assets List of Items

1. Cash 2. Accounts Receivable 3. Inventories 4. Prepaid expenses 5. Property, plant, & equipment 6. Intangibles 7. Other assets

Statement of Cash Flows Organization

1. Financing 2. Investing 3. Operating

Business Activities

1. Financing activities 2. Investing activities 3. Operating activities

Four basic Financial Statements

1. Income Statement 2. Retained Earnings Statement 3. Balance Sheet 4. Statement of Cash Flows

Financial Statement Preparation Order

1. Income Statement 2. Retained Earnings Statement 3. Balance Statement 4. Statement of Cash Flows

Income Statement

1. Order Prepared: 1 2. Financial Accounting Objective: Reports change in financial condition 3. Description: A summary of the revenue and expenses for a specific period of time, such as a month or a year.

Retained Earnings Statement

1. Order Prepared: 2 2. Financial Accounting Objective: Reports change in financial condition 3. Description: A summary of the changes in the retained earnings in the corporation for a specific period of time, such as a month or a year.

Balance Sheet

1. Order Prepared: 3 2. Financial Accounting Objective: Reports financial condition. 3. A list of the assets, liabilities, and stockholders' equity as of a specific date, usually at the close of the last day of a month or a year.

Statement of Cash Flows

1. Order Prepared: 4 2. Financial Accounting Objective: Reports change in financial condition 3. A summary of the cash receipts and cash payments for a specific period of time, such as a month or a year.

Retained Earnings Statement List of Items

1. Retained earnings from previous period. 2. Add net income (from Income Statement) 3. Less dividends (not an expense but a distribution of net income to stockholders) 4. Increase in retained earnings (net income - dividends) 5. Retained earnings, current period total.

Operating activities (types)

1. Revenue 2. Sales 3. Fees earned 4. Expenses 5. Cost of Merchandise Sold 6. Cost of Sales 7. Cost of Goods Sold 8. Selling Expenses 9. Administrative Expenses 10. Net Income 11. Net Loss

Financial accounting objectives

1. To report the financial condition of a business at a point in time. 2. To report changes in the financial condition of a business over a period of time.

Financing activities (types)

1. borrowing 2. issuing shares of ownership

Investing activities (types)

1. tangible assets 2. intangible assets 3. prepaid expenses 4. accounts receivable

Corporation

A business organized under state or federal statutes as a separate legal entity. Ownership is divided into shares of stock. 20% of businesses in the U.S.

Proprietorship

A business owned by one individual. 70% of businesses in the U.S.

Partnership

A business owned by two or more individuals. 10% of businesses in the U.S.

Limited Liability Company (LLC)

A business that combines attributes of a partnership and a corporation. Members' liability for debts of the company is limited to their investment.

Interest payable

A liability to pay interest on a due date.

Bonds payable

A type of long-term debt financing with a face amount that is in the future with interest that is normally paid semi-annually.

Note payable

A type of short- or long-term financing that requires repayment of the amount borrowed plus interest.

Language of business

Account is often called the "language of business" because it is a primary means by which business information is communicated to the stakeholders.

Business Entity Concept

An accounting concept that limits the economic data in the accounting system of a specific business or entity to data related directly to the activities of that business or entity.

Securities and Exchange Commission (SEC)

An agency of the U.S. government that has authority over the accounting and financial disclosures for corporations whose stock is traded and sold to the public.

International Accounting Standards Board (IASB)

An authoritative body that establishes accounting principles and practices for companies outside of the United States.

Accounting

An information system that provides reports to stakeholders about the economic activities and condition of a business.

Business

An organization in which basic resources (inputs), such as materials and labor, are assembled and processed to provide goods and services (outputs) to customers.

Balance Sheet List of Items

Assets = Claims (Rights to the Assets)

Prepaid expenses

Assets resulting from the prepayment of future expenses such as insurance or rent that are expected to become expenses over time or through the normal operations of the business; often called deferred expenses.

Tangible assets (Property, plant, and equipment)

Assets such as machinery, buildings, computers, office furnishings, trucks, and automobiles that have physical characteristics.

Corporations

Businesses that require a large amount of resources, such as many manufacturing businesses. Many large retailers are also corporations.

Product or service market stakeholders

Buyers of products or services and vendors to the business. Ex: Customers and suppliers.

Financial accounting objective 2

Can be thought of as a moving picture (video) of the company's financial (economic) performance over time.

Financial accounting objective 1

Can be thought of as a still photograph (snapshot) of the company's financial (economic) condition as of a point in time.

Manufacturing Business

Change basic inputs into products that are sold to customers. Ex: Auto industry, computers, technology, pharmaceuticals.

Comptroller or Chief Financial Officer

Chief accountant of a company

Government stakeholders

Collect taxes and fees from the business and its employees. Ex: Federal, state, and city governments.

Selling expenses

Costs directly related to the selling of a product or service such as sales salaries and advertising expenses. Ex: sales salaries, sales commissions, freight, and advertising.

Administrative expenses

Costs not directly related to selling, such as officer salaries.

Expenses

Costs used to earn revenues. Ex: wages of employees, salaries of managers, rent, insurance, advertising, freight, utilities.

Dividends

Distributions of the earnings of a corporation to its stockholders.

Financial Statements

Financial reports that summarize the effects of events on a business. Financial statements report the financial condition of a business at a point in time and changes in the financial condition over a period of time. There are four.

Accounting Concepts

Generally Accepted Accounting Principles (GAAP)

Internal stakeholders

Individuals employed by the business. Ex: Employees and managers.

Rights of creditors

Liabilities

Intangible assets (patents, goodwill, and copyrights)

Long-lived assets that are useful in the operations of a business, are not held for sale, and are without physical qualities.

Retained Earnings

Net income retained in a corporation.

Service Business

Provide services rather than products or customers. Ex: Transportation, Entertainment.

Capital market stakeholders

Providers of major financing for the business. Ex: Banks, owners, stockholders.

Accounts receivable

Receivables created by selling merchandise or services on credit.

Net cash flow from operating activities

Reported first. A focus of employees, managers, suppliers, customers, and other stakeholders who are interested in the long-term success of the company.

Net cash flow from investing activities

Reported second. Companies that are expanding rapidly normally report negative net cash flows, companies that are downsizing or selling segments of the business may report positive net cash flows.

Net cash flow from financing activities

Reported third. Cash receipts from issuing debt or stock are reported, cash payments of debt and dividends are reports.

Statement of financial condition

Reports the financial condition as of a point in time; often referred to as the "balance sheet."

Income Statement List of Items

Revenues -Sales Expenses -Cost of sales -Selling and Administrative expenses -Interest expense -Income taxes expense -Other expense Net income

Sales

Revenues received from selling products.

Fees earned

Revenues received from selling services.

Generally Accepted Accounting Principals (GAAP)

Rules for the way financial statements should be prepared.

Retained Earnings Statement Period Covered

Same period of time as the income statement.

Merchandising Business

Sell products they purchase from other businesses to customers. Ex: Walmart, Amazon.

Types of Businesses

Service, Merchandising, & Manufacturing

Bonds

Sold to investors and require repayment with interest. Face value of the bond usually requires repayment several years in the future. "Long-term financing."

Balance Sheet Preparation

Step 1. Each asset is listed and added to arrive at total assets. Step 2. Each liability is listed and added to arrive at total liabilities. Step 3. Each stockholders' equity item is listed and added to arrive at total stockholders' equity. Step 4. Total liabilities and total stockholders' equity is added to arrive at total liabilities and stockholders' equity. Step 5. Total assets must equal total liabilities and stockholders' equity.

Rights of stockholders

Stockholders' equity or owners' equity

Account Primary Purpose

Summarize the financial performance of the business for external stakeholders.

Financial Accounting Standards Board (FASB)

The authoritative body that has the primary responsibility for developing accounting principles. Publishes "Statements of Financial Accounting Standards" and interprets the "standards."

Common stock

The basic type of stock issued to stockholders of a corporation when a corporation has issued only one class of stock.

Managerial accounting

The branch of accounting that aids management in making financing, investing, and operating decisions for the company.

Financial Accounting

The branch of accounting that is associated with preparing reports for users external to the business. Can also be used to guide management in making financing, investing, and operations decisions for the company.

The balance sheet and statement of cash flows are integrated

The cash on the balance sheet also appears as the end-of-period cash on the statement of cash flows.

Cost of Sales

The cost of products sold also may be referred to as cost of merchandise sold or cost of goods sold.

Cost of goods sold

The cost of products sold also may be referred to as cost of merchandise sold or cost of sales.

Cost of merchandise sold

The cost of products sold also may be referred to as cost of sales or cost of goods sold.

Net Loss

The excess of expenses over revenues.

Net Income

The excess of revenues over expenses.

Profit

The excess of the amounts received from customers for goods or services and the amounts paid for the inputs used to provide the goods or services.

Revenues

The increase in assets from selling products or services to customers.

The income and retained earnings statement are integrated

The net income or net loss reported on the income statement also appears on the retained earnings statement as either an addition (net income) to or deduction (net loss) from the beginning retained earnings.

Assets

The resources owned by a business.

The retained earnings statement and the balance sheet are integrated

The retained earnings at the end of the period on the retained earnings statement also appears on the balance sheet as a part of stockholders' equity.

Stockholders' equity

The stockholders' rights to the assets of a business.

Capital Stock

Types of stock a corporation may issue.

Operating activities

Used to earn revenues and profits.

Investing activities

Used to obtain assets such as buildings and equipment to begin and operate the company. Ex:

Financing activities

Used to obtain the necessary funds (monies) to organize and operate the company. Ex: borrowing, issuing shares of ownership.

Account Payable

When a company borrows from a vendor or supplier. Usually requires repayment within a short time, such as 30 days.

Low-cost strategy

a company designs and produces products or services at a lower cost than its competitors. Often sell no-frills, standardized products and services.

Premium-price strategy

a company tries to design and produce products or services that serve unique market needs, allowing it to charge premium prices. Often design and market their products so that customers perceive their products or services as having a unique quality, reliability, or image.

Liability

a legal obligation to repay the amount borrowed according to the terms of the borrowing agreement.

Business Stakeholders

a person or entity with an interest in the economic performance and well-being of a company.

Role of Accounting

provide information about the financing, investing, and operating activities of a company to its stakeholders.