Financial Accounting 101
structure of a balance sheet
1. name of entity 2. title of the statement 3. specific date of the statement 4. unit of measurement
structure of an income statement (statement of stockholders' equity)
1. name of the entity 2. title of the statement 3. accounting period 4. unit of measure
corporation
a business incorporated under the laws of a particular site (owners as usually stockholders or shareholders and enjoy limited liability)
accounting
a system that collects and processes (analyzes, measures, records) financial information about an organization and reports that information to decision makers
audit
an examination of the financial reports to ensure that they represent what they claim and conform with GAAP
sole proprietorship
an unincorporated business owned by one person; it usually is small in size and is common in the service, retailing, and farming industries
partnership
an unincorporated business owned by two or more persons known as partners (each general partner has unlimited liability)
supply chain managers
analyze suppliers' financial statements to see whether the suppliers have the resources to meet demand and invest in future development
basic accounting equation (balance sheet equation)
assets = liabilities + stockholders' equity
four basic financial statements
balance sheet, income statement, statement of stockholders' equity, statement of cash flow can be prepared at any point in time (year, quarter, month) and can apply to any time span (one year, one quarter, one month)
retained earnings equation
beginning retained earnings + net income - dividends = ending retained earnings
Ponzi scheme
borrowing more and more money and using it to pay off earlier creditors
financing activities
borrowing of paying money back to lenders and receiving additional funds from stockholders or paying them dividends (Le-Nature's example)
investing activities
buying or selling items such as plant and equipment used in the production of beverages (Le-Nature's example)
cash flows from operating activities
cash flows that are directly related to earning income
cash flows from financing activities
cash flows that are directly related to the financing of the enterprise itself
revenues
earned from the sale of goods or services to customers
assets
economic resources owned by the entity
creditors and stockholders
external decision makers
quarterly reports
financial statements for external users (investors and creditors) at the end of each quarter
annual reports
financial statements for external users (investors and creditors) at the end of the year
business activities
financing activities, investing activities, operating activities
securities and exchange commission (SEC)
has powers to determine the measurement rules for financial statements that companies issuing stock to the public (publicly traded companies) must provide to stockholders
financial accounting standards board (FASB)
has the responsibility to establish groups that are given the primary responsibilities to work out the detailed rules that become generally accepted accounting principles
cash flows from investing activities
include those related to the acquisition or sale of the company's plant and equipment and investments
liabilities
indicate the amount of financing provided by creditors (company's debt or obligations)
stockholders' equity
indicates the amount of financing provided by owners of the business and reinvested earnings
managers
internal decision makers
common stock
investment of cash and other assets in the business by stockholders
creditor
lending to a company; make money on loans by charging interest
net income (net earnings)
measure of performance for an income statement; revenues - expenses (the excess of total revenues over total expenses)
increase
net income from the income statement results in a(n) _____ in ending retained earnings on the statement of stockholders' equity
does not
net income normally _____ equal the net cash generated by operations
FASB accounting standards codification
official pronouncements of the FASB
accounting entity
organization for which financial data are to be collected
dividends
portion of what the company earned in the form of cash payments
balance sheet
reports amount of assets, liabilities, and stockholders' equity of any accounting equity at one point in time
statement of cash flow
reports inflows and outflows of cash during the accounting period in the categories of operating, investing, and financing
income statement (statement of income, statement of earnings, statement of operations, statement of comprehensive income)
reports the revenues less the expenses of the accounting period
statement of stockholders' equity
reports the way that net income and the distribution of dividends affected the financial position of the company during the accounting period
expenses
represent the dollar amount of resources the entity used to earn revenues during the period
stockholders
sole owners of a company
3 main types of business entities
sole proprietorship, partnership, and corporation
ethics
standards of conduct for judging right from wrong, honest from dishonest, and fair from unfair
income statement
statement of stockholders' equity covers a specified period of time (accounting period) like a(n) ________
equals
the change in cash on the cash flow statement added to the beginning-of-the-year balance in cash _____ the end-of-the-year balance in cash on the balance sheet
operating activities
the day to day process of purchasing raw tea and other ingredients from suppliers, manufacturing beverages, delivering them to customers, collecting cash from customers, and paying suppliers
generally accepted accounting principles (GAAP)
the measurement and disclosure rules used to develop the information in financial statements
accounting period
time period covered by the financial statements
human resource managers
use financial statements as a basis for contract negotiations over pay rates
"the notes are an integral part of these financial statement"
warns users that failure to read the notes (footnotes) to the financial statement will result in an incomplete picture of the company's financial health