ACC210 Chapter 1 A Framework for Financial Accounting

Financial Statements

1. Income Statement 2. Statement of stockholders' Equity 3. Balance Sheet 4. Statement of cash flows

2 Fundamental Qualitative Characteristics

1. Relevance 2. Faithful representation

Two functions of financial accounting

1. measure business activities of a company 2. communicate those measurements to EXTERNAL parties for decision making purposes

double taxation

1. the company first pays corporate income taxes on income it earns 2. stockholders then pay personal income taxes when the company distributes that income as dividends to them.

Income Statement (Revenues - Expenses = Net Income)

A financial statement that reports the company's revenues and expenses over an interval of time.

more precise definition of accounting

A system of maintaining records of a company's operations and communicating that information to decision makers.

faithful representation

Accounting information that is complete, neutral, and free from error.

relevance

Accounting information that possesses confirmatory value and/or predictive value, and that is material.

Revenues

Amounts recognized when the company sells products or services to customers. (providing service to a customer)

Corporation

An entity that is legally separate from its owners.

Financial Accounting Standards Board (FASB)

An independent, private body that has primary responsibility for the establishment of GAAP in the United States.

International Accounting Standards Board (IASB)

An international accounting standard-setting body responsible for the convergence of accounting standards worldwide.

Expenses

Costs of providing products and services and other business activities during the current period. (rent) (salaries) (supplies) (utilities)

disadvantage of a corporation is

DOUBLE TAXATION

Net income [earnings][profits]

Difference between all revenues and all expenses for the period. (R>E= net income) (R<E= net loss)

dividends (NOT AN EXPENSE) (distributions[cash] to stockholders)

Distributions to stockholders, typically in the form of cash. Not cost related to providing products and service to customers.

Certified Public Accountants (CPA)

Licensed professional accountants who serve the general public.

Financial Accounting

Measurement of business activities of a company and communication of those measurements to external parties for decision-making purposes.

Big 4 Accounting Firms

PricewaterhouseCoopers (PwC), Deloitte, Ernst & Young, KPMG

KEY POINT #1

The functions of financial accounting are to measure business activities of a company and to communicate information about those activities to investors and creditors and other outside users for decision-making purposes.

Who has the claims to the company's resources?

The investors and creditors

Generally Accepted Accounting Principles (GAAP)

The rules of financial accounting.

Public Company Accounting Oversight Board (PCAOB)

To ensure that auditors follow a strict set of guidelines when conducting their audits of public companies' financial statements

auditors

Trained individuals hired by a company as an independent party to express a professional opinion of the conformity of that company's financial statements with GAAP. They add credibility to a company's financial statement

Liabilities (creditors' claims)

amounts owed to creditors (owed to: suppliers + employees + utility companies + government[tax]) these claims must be paid by a specified date

share of ownership is typically referred to as a share of

common stock

accounting information is provided for EXTERNAL users is referred to as

financial accounting

Securities and Exchange Commission (SEC)

government agency that regulates U.S. securities markets + the power to require companies that publicly trade their stock to prepare periodic financial statements for distribution to investors and creditors

investing activities

include transactions involving the purchase and sale of resources that are expected to benefit the company for several years (buying equipment)

operating activities

include transactions that relate to the primary operations of the company, providing products and services to customers and the associated costs of doing so (rent) (salaries) (utilities) (taxes) (advertising)

financing activities

include transactions the company has with investors and creditors (issuing stock) (borrowing money from bank)

completeness

including all information necessary for faithful representation of the business activity the firm if reporting

Confirmatory value

making sure the company is using the resources effectively and efficiently

accounting information is provided for INTERNAL users (managers) is referred to as

managerial accounting

sole proprietorships and partnership don't

offer limited liability

stockholders' equity (owners' claims)

owners' claims to resources ()

limited liability

prevents stockholders from being held personally responsible for the financial obligations of the corporation

predictive value

provide information for the company's future

materiality

reflects the impact of financial accounting information on investors' and creditors' decisions.

if you borrow money from a local bank and agree to repay within X years

the bank is your CREDITOR

Accounting is

the language of business

freedom from error

the reported amounts reflect the best available information

Assets (resources)

total resources of a company (cash + equipment + supplies + inventory for sale + building + land + investments)

value of a company to its owners =

total resources of the company - amounts owed to creditors

neutrality

unbiased