Accounting Exam 1

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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


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