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.