COB 241 Chapter 1

Accounting

The practice of providing information to stakeholders regarding the economic performance and well-being of a business.

Stakeholder

A person or entity with an interest in the economic performance and well-being of a business.

Financial Accounting

Provides information to external stakeholders such as resource providers, government agencies, analysts, and media.

Managerial Accounting

Provides information to internal stakeholders like managers and employees.

FASB

The Financial Accounting Standards Board; sets measurement and reporting rules in the U.S.

GAAP

Generally Accepted Accounting Principles; the U.S. measurement rules for accounting.

IFRS

International Financial Reporting Standards; rules used by most countries for accounting.

Asset

Resources acquired by a business and used to make money.

Liability

Obligations a business owes to creditors, such as debts.

Interest

A fee charged by creditors when money is borrowed.

Common Stock

Certificates showing investor contributions to a business, representing ownership.

Stockholders' Equity

The business's commitment to stockholders; owners' claim on assets.

Dividends

Distributions of earnings to shareholders, not considered an expense.

Revenue

The economic benefit earned from providing goods or services to customers.

Expense

Economic sacrifices incurred to generate revenue.

Net Income

Revenues minus expenses; represents the profit.

Retained Earnings

Profits kept in the company after dividends are paid, used for growth and emergencies.

Double-entry Bookkeeping

A method where every transaction affects the accounting equation in at least two places.

Accounting Equation

Assets = Liabilities + Stockholders’ Equity.

General Ledger

The complete collection of a company’s accounts.

Income Statement

A financial statement that shows revenues minus expenses to calculate net income over a period.

Statement of Changes in Equity

Shows changes in equity from common stock and retained earnings.

Balance Sheet

A financial statement that shows assets, liabilities, and equity at a specific point in time (a snapshot).

Statement of Cash Flows

Shows inflows and outflows of cash during a period.

Financing Activities

Cash transactions with owners or creditors such as issuing stock, borrowing, or paying dividends.

Investing Activities

Cash transactions involving long-term assets like buying or selling land, equipment, and buildings.

Operating Activities

Day-to-day transactions such as paying expenses, collecting revenue, or interest.

Examples of stakeholders

Creditors, investors, government regulators, analysts, attorneys, media, management, employees.

Examples of assets

Cash, land, equipment, inventory.

Ways assets can increase

By increasing liabilities, increasing equity, or decreasing another asset.

Ways assets can decrease

By decreasing liabilities, decreasing equity, or increasing another asset.

The four main financial statements

Income Statement, Statement of Changes in Equity, Balance Sheet, Statement of Cash Flows.

Classify: Earned $300,000 revenue.

Operating

Classify: Sold a warehouse for $85,000.

Investing

Classify: Borrowed $50,000 from the bank.

Financing

Classify: Paid $10,000 dividends.

Financing

Classify: Paid $45,000 salaries.

Operating

Classify: Repaid $25,000 bank loan.

Financing

Classify: Bought $70,000 equipment.

Investing

Classify: Received $100,000 from issuing stock.

Financing