Accounting Chapter 1

income statement

a financial statement listing an entity's revenues, expenses, and net income or net loss for a specific period. AKA statement of operations

expenses

decrease in retained earnings that results from operations. The cost of doing business opposite of revenue.

net income

excess of total expenses over total revenues

Long term assets will be

held longer than one year.

going-concern assumption

holds that the entity wil remain in operation for the forseeable future

What is retained earnings?

portion of the net income that the company has kept

historic cost principle

principle that states that assets should be recorded at their actual cost

investing activities

purchasing and selling long term assets

paid-in capital

the amount of stockholders equity that stockholders have contributed to the corporation

Net Income or Net losses flows from.....

the income statements to the statement of related earnings.

4 Statements accountants have to produce

1.) Income Statement 2.) Statement of Returned Earnings 3.) Cash Flow Statements 4.) Balance Sheet

limited liability company

A business organization in which the business is liable for the companies debts

long term assets

Assets that are expected to benefit the entity for long periods of time, beyond the end of the next fiscal year. These usually include investments, property, and equipment, and intangible assets

Amortization

Allocation of the cost of an intangible asset to expense over its useful life

Current asset

An asset that is expected to be converted to cash, sold, or consumed, during the next 12 months or w/in the business's normal operating cycle if its longer than one year

Liability

An economic obligation (debt) payable to an individual or an organization

Asset

An economic resource that is expected to be of benefit in the future

Entity

An organization or a section of an organisms that stands apart from other organizations and individuals as a separate economic unit

net earnings

Another name for net income

Capital

Another name for the owners equity of a business

Accounting equation

Assets = Liabilities + Owners Equity

Balance sheet ... =

Assets = Liabilities + Stockholders Equity

What does the balance sheet report?

Assets, Liabilities, Stakeholders Equity

Stockholders equity on the balance sheet

Represents stockholders ownership of the business assets -consists of common stock -additional paid in capital - retained earnings

The income statement shows the _________ ?

Bottom line

Financial statements

Business documents that report financial information about a business entity to decision makers

Statement of retained earnings

Ending RE= Beginning RE + NI - D

Current assets

Expected to be converted to cash. Sold or consumed in the next year w/in the business operating cycle.

What does accumulated deficit indicate?

Expenses exceed revenue

Corporation

Owned by stockholders.

Financial accounting

Provides info to people outside the firm

NI

R-E

statement of cash flows

Reports cash receipts and cash payments classified according to the entity's major activity: operating, investing, and financing

Net income =

Revenue - Expenses

What does the Income Statement Report?

Revenues (gains) & Expenses (loses)

What does positive balance indicate?

Revenues exceeded expenses

cash spent to acquire a building

Statement of Cash Flows

Another name for Income Statement

Statement of Operations

What is another name for the balance sheet?

Statement of financial position.

Ending balance of retained earnings

Statement of retained earnings and balance sheets and balance shet

Dividends---

Statement of return earnings

retained earnings

The amount of stockholders equity that the corporation has earned through profitable operations and has not given back to stockholders.

fair value

The amount that a business could sell an asset for, or the amount that a business could pay to settle liability

owners equity

The claim of the owners of a business to the assests of the business to the assets of the business. AKA capital, stockholders equity, or net assets.

goodwill

The excess off cost of an acquired company over the sum of the market value of its net assets

Accounting

The information system that measures business activities, processes that information into reports and financial statements and communicate the results to decision makers

Consolidation

The method of accounting used for multiple entities that are under common ownership.

What is the most important item in the financial statements?

The net income

Accounting cycle

The process by which financial statements are prepared

stable-monetary-unit assumption

The reason for ignoring the effect of inflation in the accepting records, based on the assumption that the dollar's purchasing power is relatively stable.

FASB

The regulatory body in the United States that formulates generally accepted accounting principles

stockholder's equity

The stockholders' ownership interest in the assets of a corporation.

The income statement, statement of retained earnings, and the statemet of cash flows are

dated for a period of time

The balance sheet is

dated for the exact time

Partnership

-2 or more parties as co-owners -Not a taxpaying entity -Governed by an agreement -Mutual agency ( either person can act on behalf of the entity ) -Unlimited liability -Involve risk

Current assets include....

-Cash -Short term investments -accounts & notes receivable -inventory -prepaid expense

Who uses accounting information?

-Individuals -Investors & creditors -Regulatory bodies -Nonprofit Organizations

What do accountants do?

-Measures business activities -processes data into reports -Communicates results -Produces financial statements

Limited Liability Companies

-One or many owners -Like a partnership, not a taxpaying entity -Income flows through its members - Popular form of business due to combinations of tax status & limited liability

Corporations

-Owned by stockholders -Stock represents share of ownership -Ability to raise large share of capital -Larger than proprietorship and partnerships -Formed under state -legally distinct from its owners -Double taxation -Corporate income is taxed -Stockholders taxed on distributions of earnings -Stockholders elect board of directors

Long term assets include

-Property -Plant -Equipment Land, buildings, computers, equipment -Intangibles

Financial Accountants

-Provide information for external users -Investors -Creditors -Government -The public

Managerial Accountants

-Provides information to internal users Includes... -Budgets -Forecasts

Proprietorship

-Single owner -Common business form for small retail stores and professional service providers - Personally liable for business debts

Statement of cash flows

-measures cash receipts and cash payments -4th required financial statement -operating -investing -financing

The time period that disquinshes current and long term assets and liability is

1 year

Current Liability

A debt due to be paid within one year.

segment

A division or subset of a business's operations

stockholder

A person who owns stock in a corporation. AKA shareholder

net profit

AKA net income

shareholder

AKA stockholders

International financial reporting standards

Accounting guidelines formulated by the international accounting standards board.

Generally accepted accounting principles

Accounting guidelines, formulated by the financial accounting standards board, that govern how accounting is practiced

investing activities

Activities that increase or decrease the long term assets available to the business.

Financing activities

Activities that obtain from investors and creditors the cash needed to launch and sustain the business; a section of the statement of cash flows.

Common Stock-------

Balance Sheets

Income tax payable----

Balance Sheets

Current Liabilities

Debts Payable in the next year or w/ the business cycle include... -Accounts payable -income taxes payable -Accured expenses

Long term liabilities

Debts payable more than one year from the balance sheet date include... -long term notes payable -bonds payable

Dividends

Distributions by corporations to its stockholders.

Board of Directions

Group elected by the stockholders to set policy for a corporation and to appoint its officers.

Income tax expense

Income Statement

revenue

Income Statement

revenues

Increase in retained earnings from delivering goods or services to customers or clients

Balance Sheet

List of entity's assets, liabilities and owners equity as part of a specific date. Also called the statement of financial position.

Equity method

Method of accounting required for investments where 20 to 50 percent of voting interest is owned.

Deficit

Negative balance in retained earnings caused by net losses.

operating activities

activities that create revenue or expense in the statement of cash flows operating activities affect the income statement

statement of financial position

another name for the balance sheet

statement of operations

another name for the income statement

intangible assets

assets with no tangible form that represents resources that have a value and future benefit

long term debt

balance sheet

total assets

balance sheet

management account

branch of accounting that generates information for the internal decision makers of a business such as top executives

Dividends Represents

cash paid by the business but are not considered an expense in running the business. Therefore, dividends are not included on the incomes statement, rather they are included considered a distribution of net income in the statement of retained earnings.

operating activities

cash receipts and payments from selling goods and services

non-controlling interests

interests in consolitdated entities that are more than 50 percent but less than 100 percent owned

financing activities

issuing stock and borrowing

gross profit

revenue from a particular activity minus the direct costs associated with earning that revenue

stock

shares into which the owners equity of a corporation is divided.