Ch 1 Accounting 298 Baker

based off slides/ lecture/ and adaptive learning

External Users

Individuals and organizations outside a company who want financial information about the company. ( Investors and creditors are most interested in these financial reports) Ex: suppliers, banks, customers, investors, potential investors, and tax authorities. ( They rely on financial statements to assess the company's performance and make informed decisions. )

Investors

( owners/ stockholders) Use accounting information to decide whether to buy, hold, or sell ownership shares of a company.

Creditor

(such as supplier and bankers) use accounting information to evaluate the risks of granting credit or lending money.

T/F 3 steps in accounting porpcess are identificiation, recording, and communication.

True

T/F Bookkeeping encompasses all steps in the accounting process.

False. Bookeeping is only the recording part of the process.

T/F Accountants prepare, but do not interpret financial reports

False.

T/F The 2 most common types of external users are investors and company officers ( CEO, CFO, CMO, COO)

False. The C-Suite are investors and are missing the creditors as another external user

what is SOX

It was created to protect investors from corporate fraud following massive accounting scandals like Enron and WorldCom. The law enforces strict rules on how corporations handle, audit, and report their financial data to ensure transparency and accuracy.

Generally Accepted Accounting Principles ( GAAP)

Standards that are generally accepted and universally practiced. These standards indicate how to report economic events.

Relevance

means that financial information is capable of making a difference in a decision ( which should be presented )

Faithful representation

numbers and descriptions match what really existed or happened, and they are factual

Historical Cost Principle ( Measurement Principle)

Dictates that companies record asset at their cost. ( I buy car and record it as its value today and how much i bought it for today)

Fair value principle ( measurment principle)

Assets and liabilities should be reported at a fair value ( the price received to sell an asset or settle a liability) (Disregard for now )

MONETARY UNIT ASSUMPTION

Requires that companies include in the accounting records only transaction data that can be expressed in monetary terms. (If you cannot express it in terms of money it cannot be recorded)

ECONOMIC ENTITY ASSUMPTION

Requires that the activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities. e.g., personal expenses and business expenses should be kept separate, even if youre a business owner.

SEC

Securities and Exchange Commissio

Forms of Business Ownership

Proprietorship, Partnership, Corporation

Proprietorship

Owned by one person, the owner is often the manager/ operator. The owner receives profits, suffers any losses, and is personally liable for all business debts. Ex: small business owners

Partnership

Owned by two or more ppl, often a retail and service-type business. Unlimited personal liability. Partnership agreement. Ex: Bill gates and Paul Allen for Microsoft

Corporation

Ownership divided into shares of stock. Separate legal entitty organized under state corporation law, limited liability, ease of ownership transfer, unlimited life, higher tax rates

Combining the activities of Ford and General Motors would violate the

cost principle/

economic entity assumption/

monetary unit assumption/

or the ethics principle

economic entity

A business organized as a separate legal entity under state law, having ownership divided into shares of stock, is a

Proprietorship

partnership

corporation

sole proprietorship

corporation

T/F Congress passed the Sarbanes-Oxely Act to reduce unethical behavior and decrease the liklehood of future corporate scandals

True

T/F The primary accoutnign standard-setting body in the US is the Financial Accounting Standards Board (FASB)

True

T/F The historical cost principle dictates that companies record assets at their cost. In later periods, however, the fair value of the asset must be used if its fair value is higher than its cost.

False. We do not use fair value asset, we stick with its original cost

T/F Relevance means that financial information matches what really happened; info is factual

False. Matching definition would be faithful representation

State the accounting equation and define its components

Assets = Liabilities + stockholders’ equity.

Assets MUST equal the sum of liabilities and stockholders’ equity

Assets:

Resources a business owns,

Provide future service benefits,

Cash, supplies, equipment, patents, etc.

Liability:

claims agaisnt assets ( debts and obligations).

Creditors ( party to whom money is owed )

accounts payable, notes payable, salaries and wages payable, interest payable, etc.

Stockholder’s Equity

Ownerhsip claim on total assets

referred to as residual equity

Common stock and retained earnings (Balance sheet)

notes payable

A notes payable is a formal, written legal promise by a company to repay a borrowed sum of money plus interest by a specific future date. LONGTERM

Common stock

Represents the total amount paid in by stockholders for the shares they purchase.

Revenues

Increase SE. Results from business activities entered into for the purpose of earning income.

Common sources of revenue are: sales, fees, services, commissions, interest, dividends, royalties, and rent.

Expenses

Decrease SE. the cost of assets consumed or services used in the process of generating revenue. Ex: salaries expense, rent expense, utilities expense, tax expense, etc ( dont worry about taxes much in this course)

Dividends

Decrease SE. Distribution of cash or other assets to stockholders. Dividends reduce retained earnings. However, dividends are NOT an expense.

Classify the following items as issuance of stock, dividends, revenues, or expenses. Then indicate whether each item increases or decreases stockholders’ equity.

1. Rent expense

2. service revenue

3. dividends

4. salaries and wages expense

Rent expense decreases equity

service revenue will increase equity

dividends decrease equity

salaries and wages expense decrease equity

Transactions

are a business economic events recorded by accountants.

not all activities represent transactions; ( money and numbers must be involved, receive/give cash)

they have dual effect on the accounting equation

Accounts Receivable

When we (business) has the right to RECEIVE money ( like preforming a service and recieving money

Accounts Payable

When we ( business) incur an expense, or owe money for a product/service.

Summary of Transactions

Four Financial Statements

Income Statement, Retained Earnings statement, balance sheet, cashflow statement

Income Statement

Presents the revenues and expenses and resulting net income or net loss for a specific period of time.

Retained Earnings Statement

Summarizes the changes in retained earningfs for a specific period of time

Balance Sheet

Reports the assets, liabilities, and stockholders’ equity of a company at a specific date.

Cashflow Statement

Summarizes information about the cash inflows (receipts) and outflows ( payments) for a specific period of time.

net income will result during a time period when :

assets exceed liabilities

assets exceed revenues

expenses exceed revenues

revenues exceed expenses

Revenues exceed expenses

Which of the following financial statements is prepared as of a specific date?

Balance sheet

income statement

retained earnings statement

statement of cashflows

balance sheet ( income and retained are over a period of time )

ESG Reporting: beyond the 4 financial statments.

The idea that a company’s responsibility lies with anyone who is influenced by its actions. Socially responsible business does not exploit or endanger any group of individuals

** Measurement of these factors is difficult, but many interesting and useful efforts are underway

( will not be tested)

external or internal users

Internal : running company

External : evaluating company