Chapter 1 canvas notes and HW problems
the _______ is the dominant form of business organization in the United States. This dominance is caused by the many advantages of the corporate form: (4) The primary disadvantage of a corporation is that ________
(1) limited liability for the stockholders, (2) continuity of life, (3) ease in transferring ownership (stock) (4) opportunities to raise large amounts of money by selling shares to a large number of people. its income may be subject to double taxation (income is taxed when it is earned and again when it is distributed to stockholders as dividends)
Statement of Stockholders' Equity
-Reports ownership in the company from investors -Reports what a company has done with its profits -----Paid dividends to stockholders -----Kept the money in the business (Retained Earnings)
Components of the Statement of Cash Flows
Cash Flows From Operating Activities Cash flows directly related to earning income (i.e.., related to the operating activities of the business) Cash Flows From Investing Activities Cash flows related to the acquisition or sale of productive assets (e.g.. property, plant and equipment) used in the business. Cash Flows From Financing Activities Cash flows directly related to the financing of the business (i.e.., debt and equity)
Basic equations for all 4 financial statements
Balance Sheet Assets = Liabilities + Stockholders' Equity Income Statement Revenues − Expenses = Net Income Statement of Stockholders' Equity Beginning balance + Increases − Decreases Ending balance Statement of Cash Flows +/− Cash Flows from Operating Activities +/− Cash Flows from Investing Activities +/− Cash Flows from Financing Activities Net Change in Cash
Difference between financial accounting and managerial accounting
Financial Accounting System: Focuses on preparation of four basic financial statements for external decision makers, like investors, creditors, suppliers, customers, etc.) Managerial Accounting System (preparation of detailed plans,forecasts and reports) for Internal Decision Makers (managers throughout the organization)
Elements of an annual report
Financial Statements (Income Statement, Statement of Stockholders' Equity, Balance Sheet, Statement of Cash Flows) Management Discussion and Analysis Notes to Financial Statements Auditor's Report
Types of business activities
Financing Activities: borrowing or paying back money to lenders and receiving additional funds from stockholders or paying them dividends. Investing Activities: buying or selling items such as plant and equipment used in the production of beverages. 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.
Difference between investors and creditors
Investors purchase all or part of a business and hope to gain by receiving part of what the company earns and/or selling the company in the future at a higher price than they paid. Creditors lend money to a company for a specific length of time and hope to gain by charging interest on the loan.
Accounting entity
Is the organization for which financial data are to be collected.
Why is Accounting Important?
It is the primary means of communicating financial information to outside parties
LLC
Limited Liability Corporation
LLP
Limited Liability Partnership
Management Discussion and Analysis Covers three aspects of a company:
Liquidity - ability to pay near-term obligations capital resources - ability to fund operations and expansions results of operations
Briefly explain the responsibility of company management and the independent auditors in the accounting communication process.
Management is responsible for preparing the financial statements and other information contained in the annual report for the maintenance of a system of internal accounting policies (intended to provide that transactions are processed in accordance with company authorization and reported in the financial statements) and that assets are adequately safeguarded. Independent auditors examine the financial reports (prepared by management) and the underlying records to assure that the reports represent what they claim and conform with generally accepted accounting principles (GAAP).
Example of how financial statements are related
Net income (net income statement) goes into retained earnings (statement of retained earnings), goes into stockholders' equity (balance sheet)
Do balance sheets show the value at which assets could currently be sold?
No, Every asset on the balance sheet is initially measured at the total cost incurred to acquire it. Balance sheets do not generally show the amounts for which the assets could currently be sold.
Statement of cash flows (and why it is necessary)
Reports inflows and outflows of cash during the period --answers the question how did cash change over time Why is this necessary? Because revenues and expenses on the income statement do not always equal cash collected and paid
Income statement 3 captions
Revenues are earnings from the sale of goods or services. Revenue is recognized in the period in which goods and services are sold, not necessarily the period in which cash is received. Expenses are the dollar amount of resources used up by the entity to earn revenues during a period. An expense is recognized in the period in which goods and services are used, not necessarily the period in which cash is paid. --Cost of goods sold: The cost of the products sold this period. --Selling, general and administrative: -Operating expenses not directly related to production. --Research and development: Expenses incurred to develop new products. --Interest expense: The cost of using borrowed funds. --Income tax expense: Income taxes on current period's pretax income. Income
fixed asset
asset with long-term use or value, such as land, buildings, and equipment
three main types of business entities are
sole proprietorship: A sole proprietorship is an unincorporated business owned by one person Legally, the business and the owner are not separate entities. Accounting views the business as a separate entity, however, that must be accounted for separately from its owner partnership: an unincorporated business owned by two or more persons known as partners. A partnership is not legally separate from its owners. each partner in a general partnership is responsible for the debts of the business. The partnership, however, is a separate business entity to be accounted for separately from its several owners. corporation: a business incorporated under the laws of a particular state. The owners are called stockholders or shareholders. Ownership is represented by shares of capital stock that usually can be bought and sold freely. When the organizers file an approved application for incorporation, the state issues a charter. This charter gives the corporation the right to operate as separate and apart from its owners. stockholders enjoy limited liability. Stockholders are liable for the corporation's debts only to the extent of their investments. stockholders elect a governing board of directors, which in turn employs managers and exercises general supervision of the corporation. Accounting also views the corporation as a separate business entity that must be accounted for separately from its owners.
What is Accounting?
system that collects/processes financial info about an organization and reports to decision makers
accounting period
the time period covered by the financial statements
Statement of cash flows heading
1. Name of entity 2. Title of statement 3. Specific date (Like the income statement and statement of retained earnings, this statement covers a specified period of time.) 4. Unit measure (thousands of dollars)
Statement of stockholder's equity (retained earnings section) heading
1. Name of entity 2. Title of statement 3. Specific date (Like the income statement, thisstatement covers a specified period of time.) 4. Unit measure (thousands of dollars)
Income statement heading
1. Name of entity 2. Title of statement 3. Specific date (Unlike the balance sheet, this statement covers a specified period of time.) 4. Unit measure (thousands of dollars)
Balance sheet heading
1. Name of entity 2. Title of statement 3. Specific date(financial snapshot at a specific point in time) 4. Unit measure (thousands of dollars)
Components of balance sheet (1, 2-2, 3-5)
Assets Probable future economic benefit resulting from resources obtained or controlled by the business as a result of past transactions. Examples: cash, receivables, inventory, machinery, buildings, land, and patents. Liabilities probable (expected) debts or obligations, or probable future sacrifice of economic benefits, of the entity arising from preset obligations as a result of a past transaction. Examples: accounts payable, notes payable, and bonds payable will be paid in the future with assets or services Stockholders' Equity amount of financing provided by owners and the operations of the business (net worth) It is the claim of the owners to the assets of the business after the creditor claims have been satisfied. It may be thought of as the residual interest because it represents assets minus liabilities. Contributed Capital (or common stock or capital stock)--Financing provided by stockholders Retained Earnings--Financing provided by operations less amounts paid to stockholders AOCI-Accumulated Other Comprehensive Income-adjustments to asset and liability accounts (discussed later in the course)
Basic Accounting Equation (or fundamental accounting model)
Assets = Liabilities + Stockholders' Equity
What is an auditor? What do they do?
Auditor, a professional accountant who conducts an independent examination of the financial accounting data presented by a company. Auditor gives an unqualified opinion if the financial statements present the financial position, results of operations, and cash flows in accordance with GAAP.
The Four Basic Financial Statements and their purposes
Balance Sheet (or statement of financial position): The purpose of the balance sheet is to report the financial position of an entity at a given date, that is, to report information about the assets, obligations and stockholders' equity of the entity as of a specific date. Income Statement (or statemeant of income, statement of earnings, statement of operations, statement of comprehensive income): The purpose of the income statement is to present information about the revenues, expenses, and the net income of the entity for a specified period of time. Statement of Stockholders' Equity-(textbook calls this statement of Retained Earnings in early chapters): The statement of stockholders' equity reports the changes in each of the company's stockholders' equity accounts during the accounting period including issue and repurchase of stock and the way that net income and distribution of dividends affected the retained earnings of the company during that period. Statement of Cash Flows: The purpose of the statement of cash flows is to present information about the flow of cash into the entity (sources), the flow of cash out of the entity (uses), and the net increase or decrease in cash during the period.
Who determines how information is reported? (2)
The Securities and Exchange Commission (SEC) is the U.S. government agency which determines the financial statements that public companies must provide to stockholders and the measurement rules used in producing those statements. Financial Accounting Standards Board (FASB) Private sector group that currently has responsibility for determining the detailed rules that become generally accepted accounting principles (GAAP) used to prepare financial statements
The primary responsibility for a company's financial statements lies with
The company's management.
How are the statement of cash flows and the balance sheet connected?
The ending cash balance shown on the statement of cash flows must agree with the amount shown on the balance sheet for the same fiscal period. This does NOT mean that the total increase or decrease in cash shown on the statement of cash flows must agree with the "bottom line" (net income or net loss) reported on the income statement.
Does the income statement report income earned from the beginning of the company?
The income statement does NOT report income earned since the start of the company's operations
Statement of stockholder's equity equation (retained earnings) example
The retained earnings equation is: Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings. It begins with beginning-of-the-year Retained Earnings which is the prior year's ending retained earnings reported on the balance sheet. The current year's Net Incomereported on the income statement is added and the current year's Dividends are subtracted from this amount. The ending Retained Earnings amount is reported on the end-of-period balance sheet.
GAAP
The rules that determine the content and measurement rules of the statements are called generally accepted accounting principles, or GAAP.
When are statements prepared?
The statements may be prepared at any point in time in practice, they are typically prepared at the end of each quarter (three months) and at the end of the year