Studied by 10 people
Accounting
the recording of business transactions, the preparation of reports summarizing these transactions, and the analyzing of financial information
Financial Statements
reports prepared from the accounting system
To who are financial statements made available?
individuals both inside and outside the company
Financial Accounting
refers to the records and related reports that are available to people outside of the company
Impact on the Financial Statements
looking at the financial statements from the top down and paying particular attention to how various transactions impact the financial statements
What can every business transaction be classified as?
Financing Activity
Investing Activity
Operating Activity
Financing Activities
transactions that raise funds for the company to operate or expand
Investing Activities
transactions in which the company is investing in assets that it will use in its business operations
Operating Activities
all of the other transactions that a business engages in
What are the two basic methods a company can use to raise money to help finance its operations?
Equity and Debt
Equity
refers to ownership (for a corporation, the owners are stockholders)
Equity Investors (or stockholders or shareholders)
purchasers of the stock that a corporation issues
What are two ways an equity investor can benefit from their investment?
By receiving dividends from the company
By selling their stock at some time in the future at a higher price
Dividends
payments made from a corporation to its stockholders, but under no legal requirement to make these payments
Debt
borrowing money from investors or banks
Creditors
those who loan the company money
Principal
money loaned
Interest
the amount that the creditor is charging the borrower for loaning them the money
How are creditors different from stockholder?
creditors have the legal right to receive back the money loaned
Loan Contract
specific requirements of the loan
What do loan contracts specify?
maturity date, interest that will accrue, and collateral
Maturity Date
the date by which the loan is to be repaid
Collateral
assets that are pledged by the borrower to the creditor if the borrower is not able to repay the loan
Terms
requirements specified in loan contracts
Default
company unable to repay its loans
What are investing activity purchases?
land, buildings, and equipment
What is the purpose of the Securities and Exchange Commission (SEC)?
to maintain fair and truthful capital markets
To where does SEC's coverage extend?
to publicly held corporations
What does the SEC require corporations to file?
Form 10K annually and a Form 10Q quarterly
Annual Report
SEC requires that all publicly
What are the annual reports required to include?
Balance Sheet
Income Statement
Statement of Stockholders' Equity (or statement of retained earnings)
Statement of Cash Flows
Note from CEO of company discussing management's performance and goals
Notes
Notes to the Financial Statements
gives additional information supporting the data in the financial statements
Independent auditor (or external auditor)
accounting firm that specializes in public accounting
Public Accounting
company is in business to provide accounting services to other companies
Audit
to thoroughly examine an entities bookkeeping records, financial accounts, and the policies and procedures of that entity
T or F: auditors guarantee that the financial statements are absolutely correct?
No, they simply state that they have conducted sufficient tests to allow them to issue an opinion that the financial statements do not contain any material errors
Who is responsible for the preparation of the financial statements?
company being audited
Who is responsible for expressing an opinion on the statements that management has prepared?
Auditor
Cover Letter of Financial Statements
letter from the company's independent auditors which states the auditor's opinion as to whether or not the auditors have found the financial statements to have been prepared in accordance with the required accounting standards
Big Four
Most widely known accounting firms
What are the Big Four accounting firms?
Deloitte, KPMG, EY, PwC
Internal Auditors
Auditors employed by the company and that audit departments within the company
Internal Controls
rules and procedures that help ensure that the employees comply with the policies of the company as well as those of outside regulators
Corporate Governance
mechanisms in place within a company which inspire managers to report the truth in their financial statements
How does society exert pressures on management?
Reputation of managers and business
Threat of legal liability
Ethics
Generally Accepted Accounting Principals (GAAP)
gives direction on how to account for both common and uncommon transactions of companies
What is the goal of GAAP?
to establish rules so that outside readers of financial statements can trust that statements from different companies will be comparable
Rules Based System
GAAP gives specific directions for how to account for all types of transactions
What does the SEC requrie?
publicly held companies based in the United States have to prepare financial statements using GAAP
Financial Accounting Standards Board
Have to maintain the conceptual framework
Conceptual Framework
provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity
What are the two fundamental qualitative characteristics of the Framework in providing useful financial information?
relevance and faithful representations (to enhance usefulness: comparability, verifiability, timelines, and understandability)
International Financial Reporting Standards (IFRS)
accounting standards for companies based in most other countries
International Accounting Standards Board
take responsibility for the IFRS
What is the main difference between IFRS and GAAP?
IFRS gives less guidance and relies on interpretation (IFRS considered principles
Reporting Entities
organizations that prepare financial statements (ex: company or firm)
How can profit seeking entities be categorized?
Service
Retail
Manufacturing
Service
businesses whose main source of revenue is their knowledge and abilities rather than a product
Retail
companies that buy inventory from manufacturers or wholesalers and resell it to consumers at a higher price
Manufacturing
business which purchase inventory, process it in some way, and sell a different product than they had originally purchased
Corporation
Business that is incorporated
Incorporated
established as a separate legal entity
What is the main advantage to incorporating?
stockholders have limited liability (creditors of a corporation don't have the right to go against stockholders' personal assets)
In what ways are corporations taxed?
Regular or C corporation
Regular Corporations
Must pay income tax
Double Taxation
income of a corporation is taxed twice
Where is income of a corporation taxed?
once when its earned, gain to the stockholder if the corporation pays dividends
Note 
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