Chapter 1

Accounting

An information and measurement system that identifies, records, and communicates an organization’s business activities

Record/Bookkeeping

Part of accounting that involves recording transactions and events, either manually or electronically

Financial Accounting

Focuses on the needs of external users

Managerial Accounting

Focuses on the needs of internal users

External Users

Do NOT directly run the organization & have limited access to accounting information

General-purpose financial statements

EX. Lenders, Shareholders, independent auditors, etc.

Internal Users

Directly manage the organization

EX. Purchasing managers, HR managers, Production managers, etc.

Opportunities in Accounting

Financial, Managerial, Taxation, and Accounting-related

Data Analytics

Process of analyzing data to identify meaningful relations and trends

Descriptive Analytics

Summarizes & describes events from the past

Diagnostic Analytics

Reveals causes of events from the past

Predictive Analytics

Predicts likely events for the future

Prescriptive Analytics

Creates action plans to achieve a desired future

Cognitive Analytics

Involves using AI and machine learning to analyze and understand data in a way that mimics human cognition

Data Visualization

A graphical presentation of data to help people understand its significance and draw reliable inferences

Dashboard

Includes charts, graphs, and other imaging organized for users to see important trends and relations

3 Factors to Committing Fraud

Opportunity

Pressure/Incentive

Rationalization

Internal Controls

All policies and procedures used to protect assets, ensure reliable accounting, promote efficiency, and uphold company policies

Auditors

Verify effectiveness of internal controls

Generally Accepted Accounting Principles (GAAP)

Rules that specify acceptable accounting practices.

Wants information to have relevance & faithful representation

Financial Accounting Standards Board (FASB)

Independent group of full-time members responsible for setting accounting rules.

Securities and Exchange Commission (SEC)

Federal agency Congress has charged to set reporting rules for organizations that sell ownership shares to the public.

Audit

Analysis and report of an organization’s accounting system, its records, and its reports using various tests.

International Accounting Standards Board (IASB)

Group that identifies preferred accounting practices and encourages global acceptance

International Financial Reporting Standards (IFRS)

Set of international accounting standards explaining how types of transactions and events are reported in financial statements

4 Accounting Principles

Measurement (Cost) Principle

Revenue Recognition Principles

Matching (or expense recognition) Principle

Full Disclosure Principle

Measurement (Cost) Principle

Accounting info is based on actual cost and is objective

Cost is measured on a cash or equal-to-cash basis

Measured by cash paid or the cash value of what is given or received

Revenue Recognition Principle

Revenue is recognized:

1. When goods/services are provided to customers

2. The amount expected to be received from the customer

Can be in cash or a promise to pay later (credit sales)

Matching (or Expense Recognition) Principle

Expense is recognized in the same period as the revenue recognized as a result of that expense

Full Disclosure Principle

Company reports the details behind financial statements that would impact users’ decisions

Often in notes to the statements

Going-Concern Assumption

Information presumes that the business will continue operating instead of being closed/sold

Monetary Unit Assumption

Transactions and events are expressed in monetary, or money, units

Time Period Assumptions

Life of a company can be divided into time periods and useful reports can be prepared for those periods

Business Entity Assumption

A business is accounted for separately from other entities and its owners

Cost-Benefit (Cost) Constraint

The notion that the benefit of a disclosure exceeds the cost of that disclosure.

Assets

Resources a company owns or controls

Expected to yield future benefits

Receivable

An asset that promises a future inflow of resources

Liabilities

Creditors’ claims on assets

Company obligations to provide assets, products, or services to others

Payable

Liability that promises a future outflow of resources

Equity

Owner’s claim on assets

= assets - liabilities

Common Stock

Inflows of cash & other net assets from shareholders in exchange for stock

Dividends

Outflows of cash & other assets to shareholders that reduce equity

Revenues

Increase equity (thru net income) from sales of products & services to customers

Expenses

Decrease equity (thru net income) from costs of providing & services to customers

External Transactions

Exchanges of economic value between one entity and another entity

Affects accounting equation

Internal Transactions

Activities within an organization

May or may not use accounting equation.

Events

Happenings that both affect an organization’s financial position and can be reliably measured

Net Income

Revenue exceeds expenses

Net Loss

Expenses exceeds revenue

Retained Earnings

Cumulative net income - any dividend distributions

Account Form

Assets on Left

Liabilities & Equity on Right

Report Form

Assets on top

Followed by Liabilities

Equity on bottom

Environmental, Social, & Governance (ESG)

Depicts how companies behave as responsible stewards of environment, members of society, & accountable leaders

Return on Assets

Ratio reflection operating efficiency

Accounting Equation

Total of everything owned by a business = Total of what the business owes to creditors & owners

Identifying

Select transactions & events

EX. Apple’s sales of iPhones

Recording

Input, Measure, & Logging

EX. Dated logs of transactions measured in dollars

Communicating

Preparing financial statements

Analyzing & Interpreting reports and dashboards