ACCOUNTING CHAPTER 1.

Dividends (FA)

Distribute a portion of their earnings to stockholders on a regular basis.

Assets (FA)

Economic resources of a corporation.

Accounting

Is the process of identifying, measuring, and recording, and communicating financial information about a company's business activities so decision makers can make informed decisions.

Income Statement Example

It consists of two major items, revenues and expenses. The income statement differs from the balance sheet in that it covers a period of time instead of a specific date.

Current Ratio

It is an alternative measure of liquidity that allows comparisons to be made between two different companies. Current assets / Current Liabilities.

Income Statement

Reports how well a company has performed (revenues, expenses, and income) over a period of time.

Balance Sheet

Reports the resources (assets) owned by a company and the claims against those resources (liabilities and stockholders equity) at a specific point in time.

Gross Margin

Represents the initial profit made from selling a product, but it is not a measure of total profit because other operating expenses have not yet been subtracted. A change in a company's gross margin can give insights into a company's current pricing and purchasing policies, therefore providing insight into the company's future performance.

Accumulated Depreciation

Represents the total amount of depreciation that a company has expensed over the life of its assets.

Required: Prepare Hightowers Income Statement for the year ending Dec 31, 2019.

SOLUTION:

Sales Revenue

Service Revenue for companies that provide services, it arises from the principal activity of the business.

Intangible Assets

Similar to property , plant, and equipment in that they provide a benefit to a company over a number of years, they lack physical substance. EX: Patents, copyrights, trademarks, and goodwills.

Sole Proprietorship Advantages

Simple to set up and gives the owner control over the business. They can be formed or dissolved at the wishes of the owner. The owner is personally responsible for the debt of the business.

Liability (FA)

The obligation to pay the creditor.

Stockholders' Equity (FA)

The owners' claim to assets. Its considered a residual interest in the assets of a corporation that remain after deducting its liabilities.

GAAP (Generally Accepted Accounting Principles)

The standards and rules that accountants follow while recording and reporting financial activities.

Financial Statement Time Periods.

The statements are accompanied by supporting information and explanatory material called the notes to the financial statements.

Corporation

A business organized under the laws of a particular state. Apple is owned by one or more people, which are called stockholders, whose ownership interests are represented by shares of stock.

Sole Proprietorship

A business owned by one person. Account for 70% of all businesses. EX: Restaurants, photography studios, or retail studios.

Partnership

A business owned jointly by two or more individuals. EX: Physicians, Lawyers, and Accountants.

other expenses

A catch all category used to capture other miscellaneous expenses incurred by the company.

Capital

A companies liabilities and equity.

Working Capital

A measure of liquidity. Working Capital = Current Assets - Current Liabilities.

Wages payable

Amounts owned to employees for work performed.

Noncurrent Asset

They are classified as long-term, include long term investments such as property, plants and equipment, intangible assets, and other noncurrent assets.

single-step income statement

They are only two categories, total revenues and total expenses. Total expenses are subtracted from total revenues in a single step to arrive at net income.

Partnership Advantages

They provide increased access to financial resources as well as to access to the individual skills of each partners. Partnerships are accounting entities separate from the partners, however, the partners are jointly responsible for all the debt of the partnership. The Partnership is dissolved when the other leaves, but they may continue to form new partnerships and operate.

Property, Plant, and Equipment

They represent the tangible, long-lived, productive assets used by a company in its operations to produce revenue, such as land, buildings, machinery, manufacturing equipment, office equipment, and furniture.

Contra-asset

This is when accumulated deprecation is subtracted from the cost of an asset.

Creditor (FA)

When a corporation borrows money from the bank, it must repay the amount borrowed back to this person.

Accounting Entity

a company that has an identity separate from that of its owners and managers and for which accounting records are kept.

Income Statement

a financial statement that gives operating results for a specific period. The sale of goods and services and the associated cost of operating the company.

Types of Current Liabilities

accounts payable, salaries and wages payable, notes payable, interest payable, and income taxes payable.

Unearned Revenue

an obligation to deliver goods or perform a service for which a company has already been paid.

Salaries payable

an obligation to pay an employee for services performed.

Interest payable

an obligation to pay interest on money that a company has borrowed

Income Taxes Payable

an obligation to pay taxes on a company's income.

Current Assets

cash and other assets that are reasonably expected to be converted into cash within one year or one operating cycle, whichever is longer.

Types of Expenses

cost of goods sold selling expenses marketing expenses administrative expenses interest expense income taxes.

Business Activities

financing activities, investing activities, operating activities.

Income from Operations

gross margin - operating expenses.

Current Liabilities

liabilities due within a short time, usually within a year

Four Basic Financial Statements

Balance Sheet. Income Statement. Retained earnings statement. Statement of cash flows.

Notes Payable (FA)

Borrow money with the promise to repay the amount borrowed plus interest at a future date.

long-term liabilities examples

notes payable, bonds payable.

Long-term Liabilites

obligations that a company expects to pay after one year.

multiple-step income statement

provides classifications of revenues and expenses that financial statement users find useful. It contains three important subtotals.

Retained earnings statement

reports how much of the company's income was retained in the business and how much was distributed to owners over a period of time.

Statement of Cash flows.

reports the sources and uses of a company's cash over a period of time.

Forms of Business Organizations.

sole proprietorship, partnership, corporation.

Income taxes payable

taxes owed to the government.

Liquidity

the ability to pay obligations expected to become due within the next year or operating cycle.

Preparing an Income Statement.

1. Prepare a heading that includes the name of the company, the title of the financial statement , and the time period covered. 2. List the revenues of the company, starting with the sales revenue, and then list the other revenue items. Add the revenues to get total revenue. 3. List the expenses of the company, usually starting with the cost of goods sold. Add the expenses to get total expenses. 4.Subtract the expenses from the revenues to get the net income (or net loss if expenses exceed revenues).

Bond Payable (FA)

A special form of note payable that is used by corporations to obtain large amounts of money.

IFRS (International Financial Reporting Standards)

A standardized set of rules and practices in business accounting used in many countries as an alternative to US GAAP.

Accounting Info

Accounting is often referred to as the language of business.

Accounts payable

An obligation to repay a vendor or supplier for merchandise supplied to the company.

Expenses

Are the costs of the assets used, or the liabilities created, in the operation of businesses.

Fundamental Accounting Equation

Assets = Liabilities + Stockholders' Equity. The left side of the accounting equation shows the assets, or economic resources, of a company. The right side of the accounting equation indicates who has a claim on the company's assets.

Operating Activities

Assets such as cash, account receivable (the right to collect an amount due from customers), supplies, and inventory (products held for resale).

Double Taxation

At the corporate level as income is earned, and at a individual level as earnings are distributed to stockholders.

Common types of Current Assets

Cash. Short term investments which invest in the debt and stock of other companies as well as government securities. Accounts receivable is the right to collect an amount due from customers. Inventories which are the good or products held for resale to a customer. Other current assets, a catch-all category that includes items such as prepaid expenses (advance payments for rent, insurance, and other services) and supplies.

Depreciation

Companies assign, or allocate, a portion of the asset's cost as an expense in each period in which the assets are used.

Stockholders' Equity arise from two sources.

Contributed Capital, Retained Earnings.

Common Stock (FA)

Corporation's basic ownership share; also generically called capital stock.

Operating Cycle

Is the average time that it takes a company to purchase goods, resell the goods, and collect the cash from customers.

Gross Margin Formula

Gross Margin = Net Sales - Cost of Goods Sold.

SEC (Securities and Exchange Commission)

Have the power to set accounting rules for publicly traded companies.

Account Payable

If a corporation purchases goods on credit from a supplier, the obligation to repay the supplier.

Net loss

If the expenses are greater than revenues, a corporation has incurred a net loss.

Net income

If the revenues are greater than expenses.

Revenues

Increase in assets that result from the sale of products or services. They can arise from different sources and have different names depending on the source of the revenue.

Revenues

Increase in the assets that result from the sale of products and services.

Financing Activities

Obtaining the funds necessary to begin and operate a business. These funds come from either issuing stock or borrowing money.

Investing Activities

Once a corporation has obtained funds through its financing activities, it buys assets that enable it to operate. The purchase and sale of the assets that are used in operations such as property, plants, or equipment.

Financial Statements

Provide info that helps investors, creditors, and others make judgments and make predictions that serve as the basis for the various decisions they make.

Financial Accounting

Provides Information that satisfies the needs of an external decision-makers (outside demand).

Corporation adv/dis

The ability to raise capital by selling shares, the limited legal liability of owners, and the transferability of the shares give the corporation an advantage over other forms of business organizations. Corporations pay more taxes because the corporate income tax rate is greater than the individual income tax rate. Second, a corporations income is taxed twice.

Corporation Advantages

The ability to raise large amounts of money (capital) by issuing shares of a stock. A corporation is a artificial person and stockholders legal responsibility for the debt of the business is limited to the amount they invested in the business. Shares of stock can easily be transferred from one owner to another through capital markets without affecting the corporation that originally issued the stock.

Retained Earnings

The accumulated net income of a company that has not been distributed to owners in front of the dividend.

Long-Term Investments

The company expects to hold the investments for longer than one year, such as land, or buildings that a company is not currently using in operations.

Research and development expense

The cost of developing new products.

Expenses

The cost of resources used to earn revenues during a period.

Expenses

The cost of the resources used to earn revenues during a period.

Cost of goods sold

The cost to the seller of all goods sold during the accounting period.

Income from operations.

The difference between gross margins and operating expenses.

Net income.

The difference between income from operations and any non-operating revenues and expenses.

Gross Margin (Gross Profit)

The difference between net sales and the cost of goods sold (of cost of sales)

Book Value

The difference between the cost and the accumulated deprecation.

Selling, General, and Administrative Expenses.

The expenses that a company incurs in selling goods, providing services, or managing the company that are not directly related to production. These expenses include advertising expenses, salaries paid to salespersons or managers; depreciation on administrative buildings , and expenses related to insurance , utilities, property taxes, and repairs.

Revenue

The increase in assets that results from the sale of products and services.

Net Income

the difference between total revenue and total expenses when total revenue is greater.

Income Taxes Expense

the income taxes paid on the company's pretax income

IASB (International Accounting Standards Board)

the organization formed to develop worldwide accounting standards

Contributed Capital

the owners' contributions of cash and other assets to the company (includes the common stock of a company).

FASB (Financial Accounting Standards Board)

they are in charge of GAAP private institution.