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