Principles of Financial and Managerial Accounting Lesson 1

Accounting

Quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.

Quantitative

Refers to accounting's relation to numbers because it can be easily summarized.

Financial

Pertains to the financial dimension of the health and performance of a business.

Useful

Refers to how accounting is grounded in theoretical frameworks defined by U.S. accounting rules.

Decisions

The structured reporting of the past that impacts decisions about the future.

The primary purposes of accounting

To accumulate, measure, and communicate financial information about businesses and organizations.

Financial statements

Documents that contain much of the financial information of a company.

The Accounting Cycle

Details the steps involved in the production of financial information in statements, including analyzing, recording, classifying, summarizing, and reporting.

Functions of an accounting system

Include analysis of events, bookkeeping, and evaluation of financial information.

Decision-making process in accounting

Involves identifying issues, gathering information, identifying alternatives, and selecting the optimal option.

Capital

The money used by a business to acquire resources needed to make a profit.

Sources of Capital

Includes investors, creditors, and retained earnings from the business itself.

Revenue

The amount of assets created through the sale of goods and services.

Managerial Accounting

Involves gathering and analyzing information for internal decision making.

Financial Accounting

Involves gathering, reporting, and analyzing information primarily for external users such as investors and creditors.

Properties of Managerial Accounting

Include product cost, breakeven analysis, budgeting, performance evaluation, and outsource production.

Properties of Financial Accounting

Include credit analysis, production and utilization of financial statements, regulatory uses, and estimated value of a company.

Annual Report

A document that summarizes a company's results of operations and financial status over the past year and outlines future plans.

Financial Statements

Reports that summarize the financial status and results of operations of a business entity, including the balance sheet, income statement, and statement of cash flows.

Owner’s Equity

The remaining claim against the assets of a business after liabilities have been deducted.

Net Income

An overall measure of a company's performance equal to revenues minus expenses for the period.

External users of financial information

Include lenders and investors.

Lenders

Utilize financial accounting data to evaluate loan repayment ability.

Investors

Utilize financial accounting data to estimate future cash returns from investments.