Saylor BUS103 Unit 1
Accounting Equation
Assets = Liabilities + Stockholder Equity
Expenses
Costs incurred to produce revenues
Where can financial statements be found?
SEC website, "investor relations" sections of corporation's website
Cost of Goods Sold
all expenses directly related to making and storing a company's saleable goods
Periodicity (Period Rule)
an entity's life can be divided into months or years for reporting
Source transaction
any written or printed evidence of a business transaction that describes its essential facts
Consistency Rule
applying the same accounting method to each period
Historical Cost Rule
assets are recorded at original cost
Accounting Transaction
business activity or event that causes a measurable change in the accounting equation
Business Entity Concept
business has separate existence from its owners
Investing Activities
business transactions involving the acquisition or disposal of long term assets such as land, buildings, and equipment
Going Concern (Continuity) Assumption
business will operate indefinitely
Manufacturing Companies
buy materials, convert them into products and then sell the product produced
Plant assets & intangibles
carried at orginal cost less accumulated depreciation or amortization
Accounting used by service companies is usually
cash basis
Operating Activities
cash effects of transactions and other events that enter into the determination of net income
Operating cash inflows
cash received from the sale of products or services
Depreciation
cost of asset is not fully expensed, but is spread out over the years it will be used
Operating Expenses
costs incurred not directly related to the production and storage of a company's goods
Record
enter each transaction into the accounting system
Accounts receivable measured by
expected cash inflows - possible uncollectibles
Matching Rule
expenses incurred in producing revenues are deducted from the revenues they generated during the accounting period
Industry Practices Rule
following the practices of similar types of businesses
Managerial Accounting
for those inside the business, such as managers. Focuses on the parts or segments of a company
Financial Accounting
for those outside the business, such as stockholders and creditors. Relates to the company as a whole.
Financial Statements provide
formal report on financial position, cash inflows and outflows, and results of operations
Fixed Assets
things that could not easily be converted to cash, such as machinery and equipment
Financing Activities
transactions that involve creditors and owners
Money Measurement (Monetary Rule)
use of a monetary measurement
Gains typically result from
sale of long-term assets for more than book value
Income Statement expenses consist of
- Cost of Goods sold - Operating Expenses - Interest Expense - Income Tax
EBIT
- earnings before interest and taxes - on income statement: revenue - cogs - op expense
Financial information must be
- quantifiable in monetary terms - relative (capable of making a difference in decision) - reliable (faithful, verifiable, neutral)
Current Assets
- things that are or that could be turned into cash within 1 year - cash, short-term investments, receivables, inventory, other (current portion of notes receivable, other)
5 Underlying Assumptions
Business Entity Concept Going Concern (Continuity) Concept Money Measurement Stable Dollar Assumption Periodicity
IASB
International Accounting Standards Board is the primary standards setting authority for several countries outside the US
Income Statement
Describes the revenues and expenses along with the net income or loss over a period of time
Dual Entry Accounting
Every recorded transaction must affect at least 2 accounts
FASB
Financial Accounting Standards Board is the primary standards setting authority in the US
Generally Accepted Accounting Principles "GAAP"
Guidelines provided by various accounting standard setting groups in consultation with accounting professionals that give guidance on: 1) What type of financial info must be be provided 2) What format to use 3) How to measure assets, liabilities, revenues and expenses
4 Primary Financial Statements
Income Statement Statement of Owner / Stockholder Equity Balance Sheet Statement of Cash Flows
P&L Statement
Income Statment
Annual Report
Independent auditor's opinion as to fairness of financial statements, info about company's activities, products and plans
Revenues
Inflow of assets resulting from the sale of products or services to customers
Return on Assets Calculation
Net Income / Avg total assets
Statement of Cash Flows subsections
Operating Activities Investing Activities Financing Activities
External users of Financial Accounting
Owners, creditors, investors, employees, customers, governmental units, general public
Equity
Ownership of assets; all assets must be owned by someone - either the lender or the owner(s)
2 Primary Objectives of Every Business
Profitability & Solvency
Full Disclosure Principle
Report details behind financial statements that would impact users' decisions
Gross Profit
Revenue - Cost of Goods Sold
Revenue Recognition Principle
Revenue is recognized when earned (when product or service is delivered to the customer)
Accrual Accounting System
Revenue is recorded when it is earned, Expenses is incurred.
Net Income
Revenues - Expenses
Income Statement lists
Revenues - Expenses = Net Income
Accrual Accounting
Revenues recorded when earned, expenses recorded when incurred
SEC
Securities and Exchange Commission is the gov't agency that oversees US financial markets and accounting standards for PUBLIC companies
3 types of business activities
Service, merchandising, manufacturing
3 Basic Forms of Business Organizations
Sole proprietorship, partnership, corporation
Liability
Something for which the company owes
Asset
Something the business owns (has legal title) which will provide benefit now and in the future
Balance Sheet
States assets and liabilities as of a specific date
Statement of Owner's Equity (Retained Earnings)
States the changes in shareholder equity over a period of time
Cash Flow Statement
States the sources of cash and what it was used for over a period of time
Conservative Rule
Transactions should be recorded so that assets and net income are not overstated.
Dividend
a payment to stockholders; distribution of income
Accounting theory
a set of basic concepts and assumptions and related principals that explain and guide the accountant's actions in identifying, measuring and communicating economic information
Profitability
ability to generate income
Solvency
ability to pay debts as they come due
Inventory measured by
actual cost at first; later may be the lower of cost or market value
Product costs are charged to expense when
goods are sold
Expenses measured by
historical cost, necessitating a depreciation expense resulting from the consumption of assets
Rule for determining an Operating Expense
if the cost can be eliminated without affecting production, it is an operating expense
Operating cash flow
includes cash generated by and required for the daily operations of the business
Financing cash flows
includes cash paid to or received from external sources, such as lender, investors and shareholders
Investing cash flow
includes cash used for investing in long-term assets and cash received from the sale of such investments
Substance-over-form-concept
intent of the transaction vs the actual type (eg. leased auto intent is purchase)
Product Costs consist of
invoice, freight, insurance in transit, all costs of materials, labor and factory operations necessary to produce the goods
Income Statement revenues consist of
money earned by selling products or services only (not equipt)
Long term Liabilities
money expected to be paid out more than a year in the future (mortgages, bank notes)
Current Liabilities
money expected to be paid out within one year
Contributed capital
money invested by owners (stockholders)
Materiality Rule
omitting insignificant information from financial reports
Operating cash outflows
payments to suppliers, salaries, rents and taxes
Service Companies
provide service for a fee
Report
provide useful information to investors, creditors regarding cash flows, assets and liabilities
Merchandising Companies
purchase finished goods and resell them
Gain & Loss Recognition principle
record gains only when realized, but losses when they first become evident
Financial Accounting Purpose
record, summarize, report transactions of the company
Cost Rule
recording assets such as land at original cost and ignoring increases in value
Realization Rule
revenues are recorded when actually earned
Retained earnings
revenues earned after dividends are paid
Losses typically result from
the consuming of assets; usually involuntary
Stable Dollar Assumption
the dollar is accepted as a reasonable stable unit of measure. No adjustments are made for the changing value of the dollar.