Accounting Chapter 1
What are the three types of business?
Service, merchandising, and manufacturing business.
International Accounting Standards Board (IASB)
The IASB issues international financial reporting standards(IFRSs)
what is a manufacturing business?
a manufacturing business is one to change basic inputs into products that are sold to customers example: ford motor co(cars, trucks, vans) dell inc(personal computers)
what is a merchandising business?
a merchandising business is one to sell products they purchase from other businesses to customers example: walmart (general merchandise) Amazon.com(internet books,music,videos)
What are financial statements
a report that has all the info of transactions that are recorded and summarized
what is a service business?
a service business provides services rather than products to customers. Example: Delta Air Lines( Transportation service) The walt disney company( Entertainment services) taxi, movies,touring companies
what is private accounting? -a.)public accounting? -b.)what is financial accounting? -c.) what is managerial accounting ?(management accounting)
is for managerial accountants employed by a business -a.) accountants and their staff who provide services on a fee basis are said to be employed in public accounting -b.) the area that provides relevant and timely information for the decision making needs of users outside of the business such as investors, creditors, customers and the government -c.) the area of accounting that provides internal users with information such as managers and employees
what is the business entity concept
it limits the economic data in an accounting system to data related directly to the activities of the business
understanding what it means to receive cash for a service? pg 11 what are the different types of revenues
the money businesses earn from selling goods or services to customers is called REVENUES the different types of revenues : revenue earned from providing a service is recorded as FEE EARNED revenue from the sale of merchandise is recorded as SALES other revenues are rent revenue, interest revenue BUT IT IS IMPORTANT TO NOTE: when you receive revenue later for a good or a service made it is recorded as FEES EARNED ON ACCOUNT or SALES ON ACCOUNT this goes with Account Receivable(is a claim against the customer) A/R is an asset the revenue is earned and recorded as if cash had been received & when customer pay accounts cash increases and A/R decreases
what are assets? -a.)liabilities? -b.)stockholders equity?
the resources owned by a business examples: cash, land, buildings, and equipment IMPORTANT: Assets are broken down into two types (1) the rights of creditors (2) the right of owners a.) the rights of creditors are the debts of the business b.) S/E is the rights of the owners and is usually for a corporation and OWNERS EQUITY is for a proprietorship/ partnership/ LLC
what are retained earnings ?
the stockholders equity created from business operations through revenue and expense transactions see page 14
What is the objective of a business ?
to earn a profit (the diff btwn amounts received from costumers for goods vs the amount paid for the inputs used to provide the service)
what is the ration of liabilities to stockholders equity ? is it better to have a higher ratio or a lower ratio, explain
total liabilities / total stockholders equity it is better to have a lower ratio because it mean the company is better to withstand poor business conditions and still pay its obligations which are creditors because creditors always come first before stockholders to get paid
understanding what is means to buy supplies and agree to pay for it in the near future? page 11
when you decide to buy something and pay for it in the future the transaction is called PURCHASED ON ACCOUNT OR PURCHASED SUPPLIES ON ACCOUNT. the liability created by a purchase on account is called ACCOUNT PAYABLE. But items such as supplies that will be used in the business in the future are PREPAID EXPENSES which are ASSETS they go under assets. so the transaction would look like an increase asset and increase liabilities
Financial accounting standards board (FASB)
within the united states the FASB has the primary responsibility f0r developing accounting principles , the FASB
Understanding the Income Statement. -matching concept -net income, profit,earnings -net loss
- the matching concept is applied by matching the expenses incurred during a period with the revenues that those expenses generated. -a net income is the excess of the revenue over the expenses -a net loss is the if the expenses exceed the revenues
what are the four forms of business entities ?
-PROPRIETORSHIP: owned by one individual (70% in us) ex dentist, lawyer -PARTNERSHIP: owned by two or more individuals (10% in us) -CORPORATION: organized under state or federal statutes as a separate legal taxable entity in other words 0 people to create it (20% in us) (90% generate revenue in the US) - LIMITED LIABILITY COMPANY(LLC): combines the attributes of a partnership and a corporation(10% in us)
understanding what affects stockholders equity... what increases it and decreases it
-common stock -> issue stock to owners (increase) -dividends -> pay off earnings to owners (decrease) - retained earnings which are revenues and expenses IN OTHER WORDS Stockholder investments ... + dividends... - revenues...+ expenses... -
what is the cost concept? -a.) objectivity concept? -b.) unit of MEASURE concept?
Amounts are initially recorded in the accounting recored at their cost or purchase price. -a.) required that the amounts recorded in the accounting records be based on objective evidence. basically only the last price of the negotiation be recorded cause if offers were always records the account report would be too long and unreliable -b.) requires that economic data be recorded in dollars.
What is the accounting equation?
Assets= Liabilities + Stockholders Equity
what are the four financial statements and in what order do they go in
INCOME STATEMENT- summary of the revenues and expenses for a specific PERIOD of time, such as a month or a year. RETAINED EARNINGS STATEMENT- a summary of the changes in retained earnings that have occurred during a specific PERIOD of time, such as a month or a year. BALANCE SHEET- a list of the assets, liabilities, and stockholders equity as of a specific DATE, usually at the close of the last day of the month or a year. STATEMENT OF CASH FLOWS-a summary of the cash receipts and cash payments for a specific PERIOD of time such as a month or a year.
what are dividends ?
distributions of earnings to stockholders, they fall under stockholder equity they decrease S/E
Generally accepted accounting principle (GAAP)
financial accountants follow the GAAP in preparing reports, these repots allow investors and other user to compare one company to another
what are the guidelines of behaving ethical correctly?
1. identify an ethical decision by using your personal ethical standards of honesty and fairness 2. identify the consequences of the decision and its effect on others 3. consider your obligations and responsibilities to those who will be affected by your decision 4. Make a decision that is ethical and fair to those affected by it .
what is the process accounting use to provide information? (in other words things accountants do) IADRP
1. identify users 2. assess users' information needs 3. design the accounting information system to meet users needs 4. record economic data about business activities an events 5. prepare accounting reports for users
what are the three sections for the cash flow statement?
Operating activities-cash received from customers, cash payments for expenses and payments investing activities- basically reports the cash transactions of acquiring or sale of relatively permeant assets financing activities- reports the cash transactions to cash investments by stockholders borrowings and cash dividends
Securities and exchange commission (SEC)
an agency of the US government has authority over the accounting and financial disclosures for companies whose share of ownership (stock) are traded and sold to the public the SEC normally accepts the accounting principled set by the FASB
what is a business transaction?
an economic event or condition that directly changes an entity's financial condition or its results of operations
what is accounting?
an information system that provides reports to users about economic activities and conditions of the business.
what is a business?
an organization in which basic resources (inputs), such as materials and labor, are assembled and processed to provide goods and services (outputs) to customers.
what are expenses ?
assets used in this process of earning revenues are called expenses, expenses include supplies used , wages, utilities, and miscellaneous all Expense fall under Stock Holders Equity
why are the retained earnings statement know are the link between the income statement and the balance sheet
because you need the net income/ loss from the income statement to report on to the retained earnings statement and then you need the retain earnings balance to report on to the balance sheet
what is capital stock?
capital stock falls under stockholder equity, it is stock issued to stockholders (owners) in other words it is the shares of ownership distributed to investors of a corporation
what are ethics ?
moral principles that guide the conduct of individuals
what is a general purpose financial statement ?
one type of financial accounting report that is distributed to external users.