Financial Accounting: Chapter 1

Process by which accounting provides information to users

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 and events 5. Prepare accounting reports for users

Statement of cash flows

1. Operating Activities: section reports a summary of cash receipts and cash payments from operations. 2. Investing Activities: reports the cash transactions for the acquisition and sale of relatively permanent assets 3. Financial Activities: reports the cash transactions related to cash investments by the owner, borrowings, and withdrawals by the owner

Forms of business entities

1. Proprietorship - owned by one individual (70% of business entities in the US; easy/inexpensive to organize; resources are limited to those of the owner; used by small businesses; ex: A&B painting) 2. Partnership - owned by two or more individuals (10% of business organizations in the US; combines the skills and resources of more than one person; ex: Jones & Smith, Architects) 3. Corporation - organized under state or federal statues as a separate legal taxable entity (generates 90% of business revenues; 20% of business organizations in the US; ownership is divided into stocks; can obtain large amounts of resources by issuing stock; used by large businesses; ex: Google, Apple, Ford Motor Company) 4. Limited liability company (LLC) - combines the attributes of a partnership and a corporation (10% of business organizations in the US - combined with partnership; often used as an alternative to a partnership; has tax and legal lability advantages for the owners; ex: Mosel & Farmer, CPAs, LLC)

Types of businesses

1. Service business: providers services rather than customers (Delta Air Lines - transportation; Walt Disney Company - entertainment) 2. Merchandising business: sell products they purchase from other businesses to customers (Walmart - general merchandise; Amazon - Internet books, music, videos) 3. Manufacturing businesses: change basic inputs into products that are sold to customers (Ford Motor Co. - cars, trucks, vans; Dell Inc. - personal computers)

Accounting Equation

Assets= Liabilities + Owner's Equity

Managerial Accounting

Provide internal users wiwth information. THe objective is to provide relevant and timely information for managers' and employees' decision-making needs.

Generally accepted accounting principles (GAAP)

These reports allow investors and other users to compare one company to another. 1. Financial Accounting Standards Board (FASB) - primary responsibility for developing accounting principles 2. Securities and Exchange Commission (SEC) - an agency of the US government that has authority over the accounting and financial disclosures for companies whose shares of ownership (stock) are traded and sold to the public 3. International Accounting Standards Board (IASB) - countries outside the US use generally accepted accounting principles. IASB and the FASB work together to reduce and eliminate these differences into a single set of accounting principles

Cost concept

amounts are initially recorded in the accounting records as their cost or purchase price; the other amounts listed have no effect on the accounting records

Business

an organization which basic resources (inputs), such as materials and labor, are assembled and processed to provide goods or services (outputs) to customers

Business entity concept

limits the economic data in an accounting system to data related directly to the activities of the business

Financial accounting

provides external users with information; provide relevant and timely information for the decision-making needs of users outside of the business

Balance Sheet

reports the amounts of assets, liabilities, and owner's equity

Statement of Owner's equity

reports the changes in the owner's equity for a period of time. It is prepared after the income statement because the net income or net loss for the period must be reported in this statement. It is prepared before the balance sheet because the amount of owner's equity at the end of the period must be reported on the balance sheet. As a result, the statement of owner's equity is often viewed as the connecting link between the income statement and the balance sheet

Objectivity concept

requires that the amounts recorded int he accounting records be based on objective evidence; only the agreed-upon amount is objective enough to be recorded in the accounting records

Assets

resources owned by a business (cash, land, buildings, equipment)

Income statement

revenues and expenses for a period of time based on the matching concept (matches the expenses incurred during a period with the revenue that those expenses generated; the excess of the revenue over the expenses is called net income, net profit, or earnings. if expenses exceed the revenue, the excess is a net loss) net income for a period increases the owner's equity (capital) for the period; a net loss decreases the owner's equity (capital) for the period ex: Revenues and expenses of travel service for the year ended 4/30/16. Fees earned: 263,200 misc expenses: 12,950 office expenses: 63,000 wages expenses: 131,700 Prepare an income statement. Fees earned: 263,200 Expenses: -misc: 12,950 office: 63,000 wages: 131,700 total expenses: 207,650 net income: 263,200-207,650= $55,550

Financial statements

the accounting reports providing information of after transactions have been recorded and summarized; prepared for users. Primary financial statements of a proprietorship are the income statement (the statement of owner's equity, the balance sheet, and thestatement of cash flows). 1. Income statement: a summary of the revenue and expenses for a specific period of time, such as a month or a year 2. statement of owner's equity: a summary of the changes in the owner's equity that have occurred during a specific period of time, such as a month of a year 3. balance sheet: a list of the assets, liabilities, and owner's equity as of a specific date, usually at the close of the last day of a month or a year 4. statement of cash flows: a summary of the cash receipts and cash payments for a specified period of time, such as a month or a year

Profit

the difference between the amounts received from customers for goods or services and the amounts paid for the inputs used to provide the goods or services

Liabilities

the rights of creditors are the debts of the business

Owner's Equity

the rights of the owners

Laws established to tackle ethical frauds in accounting

1. Sox (Sarbanes-Oxley Act) - established a new oversight body for the accounting profession called the Public Company Accounting Oversight Board (PCAOB). SOX established standards for independence, corporate responsibility, and disclosure

Types of transactions affecting owner's equity

1. owner's investments 2. owner's withdrawals 3. revenues (net income/net loss) 4. expenses (net income/net loss)

Public accounting

Accountants and their staff who provide services on a fee basis; an accountant may practice as an individual or as a member of a public accounting firm; these people that have met a state's education, experience, and examination requirements may become Certified Public Accountants (CPA's).

Private accountants

Accountants employed by companies, government, and not-for-profit entities

Accounting

an information system that provides reports to users about the economic activities and condition of a business; AKA "the language of business"; the means by which businesses' financial information is communicated to users

Business Transaction

economic event or condition that directly changes an entity's financial condition or its results of operation (ex: paying a monthly telephone bill of $148 affects a business's financial condition because it now has less cash on hand). -the effect of every transaction is an increase or a decrease in one or more of the accounting equation elements -the two sides of accounting equation are always equal -the owner's equity is increased by amounts invested by the owner and is decreased by withdrawals by the owner -the owner's equity is increased by revenues and is decreased by expenses

Private accounting

managerial accountants employed by a business

Ethics

moral principles that guide the conduct of individuals