Chapter 1 ACC 211

Operating Cash Flows

-Cash receipts and cash payments for transactions involving revenue and expense activities during the period -cash effects of the same activities that are reported in the income statement to calculate net income

Investing cash flows

-Cash transactions for the purchase and sale of investments and long term assets -long term assets are resources owned by a company that are thought to provide benefits for more than 1 year( ex: supplies, equipment)

Financing cash flows

-Cash transactions with lenders such as borrowing money and repaying debt Cash transactions with stockholder's such as issuing stocks and paying dividends

Statement of Stockholders' Equity two components

-Common stock: (external source) represents amounts invested by stockholder's when they purchase shares of stock. -Retained earnings: (internal source) represents the cumulative amount of net income earned over the life of the company that has been kept rather than distributed as dividends.

Dividends

-Not an expense -Distribution of profits (net income) to stockholder's

Periodicity Assumption

-Relates to the qualitative characteristic of timeliness -divides the economic life of an enterprise into artificial time periods for periodic financial reports

Balance sheet

-Statement that presents the financial position of the company at a particular date -Uses the accounting equation

Public accounting includes

-auditing -tax preparation -planning or business consulting

1934 Securities and Exchange Commission (SEC)

-created a government agency, Securities and Exchange Commission (SEC) -gives the SEC the power to require publicly traded companies to prepare periodic financial statements for distribution to investor and creditors

Auditors

-express a professional opinion of the extent to which the financial statements are prepared in compliance with GAAP and are free of mistakes -apply credibility to a companies financial statements

Advantages of a corporation

-limited liability: means stock holders are not held personally responsible for the financial obligations; can not lose any of their personal assets

Sarbanes-Oxley Act (SOX)

-regulation of auditors and types of services furnished -increases accountability of corporate executives -Addresses conflicts of interests for securities analysts -provides for stiff criminal penalties for violations

Three types of cash transactions in the statement of cash flows

1. Operating cash flows 2. Investing cash flows 3. financing cash flows

Financial accounting should provide info that:

1. is useful to investors and creditors in making decisions 2. Helps to predict cash flows 3. Tells about economic resources, claims to resources and changes in resources and claims

Sole Proprietorship

A business owned by one person

SEC

Agency with both the power and the responsibility for setting accounting and reporting standards for publicly traded companies in the U.S.

Financial Accounting Standards Board (FASB)

An independent, private body that has primary responsibility for the establishment of GAAP in the United States.

Trucks owned by a transportation company

Assets

Accounting Equation

Assets = Liabilities + Stockholder's Equity

FASB

Body responsible for establishing financial accounting and reporting standards in the United States.

Oracle CEO Larry Ellison's private yacht is not treated as an asset of Oracle Corporation. Which assumption is used in making this judgment?

Economic Entity Assumption, A key aspect of the economic entity assumption is the distinction between the economic activities of owners and those of the company.

Salaries paid to employees

Expense

Financial accounting primarily deals with the methods accountants use to provide information to an organization's internal users.

False

Investors and creditors rely heavily on managerial accounting information in making investment and lending decisions.

False, Consider the users of "managerial" accounting information.

The balance of retained earnings represents the amount of earnings paid out in the form of dividends to stockholders.

False, The balance of retained earnings represents the amount of "earnings retained" (not paid out in the form of dividends) over the life of the company.

The value of a company to its owners equals total resources of the company.

False, The value of a company to its owners equals total resources of the company minus amounts owed to creditors. Creditors expect to receive only resources equal to the amount owed them. Stockholders or owners, on the other hand, can claim all resources in excess of the amount owed to creditors.

Ron owns five percent of a corporation's common stock. The concept of limited liability would imply that Ron is personally responsible for only five percent of the financial obligations of the corporation.

False, not personally responsible for financial obligations

Which assumption provides justification for measuring many assets based on their original costs instead of current liquidation values?

Going Concern Assumption, It provides justification for measuring many assets based on their original costs. If we knew an enterprise was going to cease operations in the near future, we would measure assets and liabilities not at their original costs but at their current liquidation values.

verifiability theory of meaning

Implies a consensus among different measurers.

Advantages of Sole Proprietorship and Partnerships

Lower taxes to corporations (taxed at owners income tax rate)

You are reading a particular section of a bank's annual report. This section provides the bank's views about the impact of an upcoming regulation on the banking industry as a whole and the bank in particular. Which section of the annual report are you reading?

Management discussion and analysis, The management discussion and analysis (MD&A) section typically includes management's views on significant events, trends, and uncertainties pertaining to the company's operations and resources.

Management discussion and analysis (MD&A)

Management's views on significant events, trends and uncertainties pertaining to the company's operations and resources

Understandability

Means that users must be able to comprehend the information within the context of the decision they are making.

Which of the following best explains a company's stock price performance?

Net income,

Which of the following characteristics is highly related to the establishment of accounting standards?

Neutrality, Think of the impact of bias in establishing of accounting standards.

Note disclosure

Offers additional information either to explain the information presented in the financial statement or to provide information not included in the financial statements

Timeliness

Refers to information being available to users early enough to allow them to use it in the decision process.

Comparability

Refers to the ability of users to see similarities and differences between two different business activities.

Income Statement

Report of the company's revenues and expenses over an interval of time. Shows whether the company generated enough revenues to cover the expenses of running the business.

Consulting fees earned by a firm

Revenues

IASB

Standard-setting body responsible for convergence of accounting standards across countries.

The statement of stockholder's equity

Summarizes the change in stockholder's equity over an interval of time

Going Concern Assumption

The assumption that the company will continue in operation for the foreseeable future.

This statement reports the financial position of a company at a point in time.

The balance sheet

Which of the following demonstrates that the company's resources equal creditors' claims plus owners' claims to those resources?

The balance sheet, The balance sheet demonstrates that the company's resources (assets) equal creditors' claims (liabilities) plus owners' claims (stockholders' equity) to those resources.

This statement tells you if a company is profitable.

The income statement

This statement shows the net change in cash over the period.

The statement of cash flows

This statement has two components: common stock and retained earnings.

The statement of stockholders' equity

Which of the following is an important indicator of a company management's ability to respond to business situations and the possibility of bankruptcy?

Total liabilities, Think of obligations that limit a company's performance.

If you are able to predict the change in financial accounting's measure of profitability, you can predict the change in stock prices, too.

True

The cash received from customers is reported as part of the ending cash balance in the balance sheet and as part of operating cash flows in the statement of cash flows.

True, The amount of cash in the balance sheet reappears as the ending cash balance in the statement of cash flows.

Different graders will arrive at the same exam score for multiple-choice tests, but they are more likely to differ in scoring essay exams. In this context, which characteristic does a multiple-choice test possess?

Verifiability, Think about a characteristic that involves consensus among measurers.

Which of the following questions is most likely to be asked by a creditor?

Will the company be capable of repaying its debt when it is due?

Which of the following questions is most likely to be asked by an investor?

Will the company's stock increase in value?

Partnership

a business owned by two or more people

Generally Accepted Accounting Principles (GAAP)

a set of accounting standards that is used in the preparation of financial statements

Investors claim...

any resources of the company not owed to creditors

Revenue

are the amounts recorded when the company sells products or services to costumers

Expenses

are the costs of providing products and services ex: making the product, sales commission, distribution and advertising.

Corporation

business legally separate from its owners

Employees

decide employment opportunities

competitors

decide market share and profitability

Local communities

decide on environmental issues

Regulators

decide on social welfare

tax auditors

decide on taxation policies

Managers

decide production and expansion

Suppliers

decide the customer's ability to pay for supplies

Creditors

decide whether to lend money

Costumers

decide whether to purchase products

disadvantage of corporation

double taxation

International Accounting Standards Board (IASB)

eliminate differences in accounting standards, responsible for convergence.

All companies in the United States must follow Generally Accepted Accounting Principles and must publish financial statements in accordance with those rules.

false, Only companies that sell their stock to the public must follow Generally Accepted Accounting Principles and publish financial statements in accordance with those rules.

Disadvantages of Sole Proprietorship and Partnership

is unable to pay its legal obligations to creditors the owner(s) may be forced to surrender personal assets to satisfy their debts

Amounts owed to creditors are..

liabilities

Amounts owed to a supplier of dress material

liability

Statement of Cash flows

measures activities involving cash receipts and cash payments over an interval of time

Internation Financial Reporting Standards (IFRS)

national standards

Revenues - expenses =

net income

Examples of investors (stockholder's equity)

owners

Manageral accounting

provide information for internal users ex: its own managerss

Private accounting

providing accounting services to the company that employs you

1933 Securities Act and 1934 Securities Exchange Act were designed to...

restore investor confidence in financial accounting

Financial accounting

seeks to measure business activities of a company & communicate those measurements to external parties for decision-making purposes

1933 Securities Act

sets forth accounting and disclosure requirements for initial offerings of securities (stocks and bonds)

Monetary Unit Assumption

standard unit of currency in a country's money supply

Owners claim is referred to as....

stockholder's equity (because stockholders are the owners of the corporation)

Example of creditors (liabilities)

suppliers, workers, utility companies and government, accounts payable, interest payable, salaries payable, notes payable

Economic Entity Assumption

we can identify all economic events with a particular economic entity (keep business separate from personal)

Examples of assets

Cash, inventories, supplies, buildings, land, accounts receivable, equipment

Part of the inventory of memory chips of a semiconductor company is obsolete because of the launch of more advanced products. However, the management still carries this inventory at historical prices in its balance sheet. Which primary qualitative characteristic is being violated here?

Completeness means including all information necessary for faithful representation of the business activity the firm is reporting.

Investors

Decide whether to invest in stock

Share of profits paid to owners of a company

Dividends