Accounting Exam 1
The Nature of Business
1. Obtain capital (corporate finance) 2. Make investments (managerial accounting) 3. Generate a positive future return (financial accounting)
Financial Accounting
designed primarily for decision makers outside of the company; looks backwards into the past; reports what has happened
Managerial Accounting
designed primarily for decision makers within the company; looks forward into the future; provides information for improving decisions
The two types of accounting are:
financial and managerial
Stockholders
owners of a corporation, not usually involved in day-to-day business decisions
Tangible assets
physical assets, such as real estate and automobiles, that can be held for either consumption or investment purposes
Equity
Owner's equity is the value of the firm to its owners; equity = ownership stake two primary categories: - contributed capital: owner investment - retained earnings: keep profits
Assets
The general group of resources owned and controlled by the firm; anything of economic value that is expected to provide future benefits
Goodwill
an intangible asset that arises when a buyer acquires an existing business; you CANNOT record your own goodwill as an asset
residual claim
an owner's right to receive whatever remains after all other claims against a firm's assets have been satisfied
Intangible assets
assets that do not have physical substance
Accounting is...
An evolved economic institution; the process of recording, summarizing, and analyzing financial transactions
Income Statement
A financial statement showing the revenue and expenses for a fiscal period; measures the firm's performance over a period of time Income statement = flows Revenues - Expenses = Net Income (profit)
Balance sheet
A financial statement that reports assets, liabilities, and owner's equity at a given point in time Balance sheet = stocks
Current Liabilities
Accounts payable and other debts a business must pay within one year
Accounting Equation
Assets = Liabilities + Owner's Equity Left side: what we have Right side: how we got it
Creditors
Companies who lend money
Why do we need record keeping?
Humans are fallible; our memory storage is finite. Record keeping supplements memory which helps promote exchange and trust
Retained earnings
Represa a claim on a portion of the firm's assets and are NOT an asset themselves
Liabilities
Represent the obligations that's a firm has to outside creditors
Board of Directors (BOD)
Represents shareholder interests, hire and oversee management; use financial information to evaluate future strategy
Fundamental Demand for Accounting
To help guide exchange
For what purpose do we keep records?
To help make business decisions
Current assets
cash, accounts receivable, inventory
Suppliers
companies that provide material, human, financial, and informational resources to other companies