Chapter 1: Financial Accounting

Financial Accounting

Accounting information provided to external users.

What are the two functions of financial accounting?

To Measure business activities of a company, and to communicate those measurements to external parties for decision-making purposes.

Financing Activities

Transactions the company has with investors and creditors.

Investing Activities

Transactions involving the purchase and sale of resources that are expected to benefit the company for several years.

Operating Activities

Transactions that relate to the primary operations of the company.

Corporation

A company that is legally separate from its owners. Limited liability.

Sole Proprietorship

A business owned by a person

Partnership

A business owned by two or more persons.

What is the Accounting Equation?

Assets (Resources) = Liabilities (Creditors claims) + Stockholders Equity (Owners Claims)

Assets are

The total resources of the company.

Liabilities

Amounts owed to creditors

Stockholders Equity

Owners’ claims to resources.

Revenues

The amounts recognized when the company sells products or provides services to customers

Expenses

The costs of providing products and services and other business activities during the current period.

Net Income

The difference between the revenues and expenses.

Dividends

Cash payments to stockholders (NOT EXPENSES!!)

Financial Statements

Periodic reports published by the company for the purpose of providing information to external users.

Income Statement

Reports the company’s revenues and expenses over an interval of time.

Revenues> Expenses = Net Income

Revenues< Expenses = Net Loss

Statement of Stockholders’ Equity

Summarizes the changes in stockholders’ equity over an interval of time.

Balance Sheet

Presents the financial position of the company on a particular date.

Statement of Cash Flows

Measures activities involving cash receipts and cash payments over an interval of time. Involves operating, investing, and financing cash flows.