BUS298 Integrated Business Semester 1 Part A - Chapter 1

Historical Cost Principle

(or cost principle) dictates that companies record assets at their cost.

Economy Entity Assumption

Requires that activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities.

Monetary Unit Assumption

Requires that companies include in the accounting records only transaction data that can be expressed in terms of money.

Assets

Resources a business owns. Provide future services or benefits. Cash, Supplies, Equipment, etc.

Liabilities

Claims against assets (debts and obligations). Creditors (party to whom money is owed). Accounts Payable, Notes Payable, Salaries and Wages Payable, etc.

Accounting

Consists of three basic activities. It identifies, records and communicates the economic events of an organization to interested users.

Identify and Analyze the Principal Elements in the Situation

Identify the stakeholders, persons or groups who may be harmed or benefited. Ask the question: What are the responsibilities and obligations of the parties involved?

Who Uses Accounting Data - Internal Users

Marketing, Management, Finance & Human Resources.

Proprietorship

Owned by one person. Owner is often manager/operator. Owner receives any profits, suffers any losses, and is personally liable for all debtsl

Partnership

Owned by two or more persons. Often retail and service-type businesses. Generally unlimited personal liability. Partnership agreement.

Stockholder's Equity

Ownership claim on total assets. Referred to as residual equity. Common stock and retained earnings.

Corporation

Ownership divided into shares of stock. Separate legal entity organized under state corporation law. Limited liability.

Basic Accounting Equation

Provides the underlying framework for recording and summarizing economic events. Assets must equal the sum of liabilities and stockholders' equity. If a business is liquidated, claims of creditors (liabilities) must be paid before ownership claims (stockholders' equity).

Ethics in Financial Reporting

Recent financial scandals include: Enron, WorldCom, HealthSouth, AIG, and other companies. Regulators and lawmakers concerned that economy would suffer if investors lost confidence in corporate accounting. In response, Congress passed Sarbanes-Oxley Act (SOX). Effective financial reporting depends on sound ethical behavior.

Selection of which principle to follow generally relates to trade-offs between _____________ & ___________

Relevance and Faithful Representation

Identify the Alternatives & Weigh the Impact of Each Alternative on Various Stakeholders

Select the most ethical alternative, considering all the consequences. Sometimes there will be one right answer. Other situations involve more than on right solution; these situations require an evaluation of each and a selection of the best alternative.

Generally Accepted Accounting Principles

Standards that are generally accepted and universally practiced. These standards indicate how to report economic events. Standard-setting bodies: Financial Accounting Standards Board (FASB), Securities & Exchange Commission (SEC), International Accounting Standards Board (LASB).

Fair Value Principle

States that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability).

Recognize an Ethical Situation & the Ethical Issues Involved

Use your personal ethics to identify ethical situations and issues. Some businesses and professional organizations provide written codes of ethics for guidance in some business situations.

Assets = __________ + _________

Liabilities + Stockholder's Equity

Who Uses Accounting Data - External Users

Investors & Creditors