MGMT 200 Exam 1 (Chs. 1-3)

Functions of financial accounting

• to measure business activities of a company

• to communicate those measures to external parties

Financing activities

• transactions that the company has with investors and creditors

Investing activities

• buying or selling resources that are expected to benefit the company for several years

Operating activities

• transactions related to the primary operations of the company

• ex. paying rent, salaries, utilities

Assets

the resources of a company

Liabilities

the amounts owed to creditors, suppliers, employees, utility companies, the gov

equity

• the owners’ claims to resources

• come from contributions from owners and net resources generated by company operations

Accounting Equation

assets = liabilities + stock holders’ equity

(resources = claims to resources)

revenue

money earned from selling goods/services

net income

revenue - expenses

dividends

cash payments to stockholders (do not count as expenses)

corporation

• company that is legally separate from its owners

• stockholders have limited liability (they’re not held personally responsible for the corporation’s financial obligations)

^they can lose their investments but not their personal belongings

• disadvantage is double taxation

Sole proprietorship

• business owned by 1 person

• NOT limited liability

Partnership

• business opened by 2+ people

• NOT limited liability

Double taxation

• when a company pays corporate income taxes AND stockholders pay personal income taxes on their dividends

Limited Liability Companies and Partnerships (LLCs, LLPs)

• limited liability

• avoid double taxation

^the business doesn’t pay taxes on its profits, but instead the business owners are taxed

Financial statements

• periodic reports published by the company for those outside of it

• 4 types (in order):

  • income statement

  • statement of stockholders’ equity

  • balance sheet

  • statement of cash flow

income statement

• reports revenue and expenses over an interval of time)

• “profit and loss statement”

statement of stockholders’ equity

• summarizes changes in stockholders’ equity over an interval of time

• stockholders’ equity comes from common stock and retained earnings

  • S.E = common stock + retained earnings

• includes net income, common stock, retained earnings

Balance sheet

• presents the financial position of a company on a certain date

• includes assets and liabilities, stockholders’ equity, accounting equation

Statement of cash flows

• lists inflow and outflow of money over an interval of time

  • operating cash flows (rev., expenses)

  • investing cash flows (assets that a co. invests in)

  • financing cash flows ($ to/from creditors and stockholders)

Company Annual Report

- includes:

• financial statements

• management discussion and analysis (MD & A)

• note disclosures to the financial statements

- required by the SEC to be released by companies at the end of each fiscal year

GAAP

Generally Accepted Accounting Principles

FASB

• Financial Accounting Standards Board

• governed by the Securities and Exchange Commission (SEC)

• international equivalent is the International Accounting Standards Board (IASB)

Auditors

Trained individuals hired by a company as an independent party to express a professional opinion about how the financial statements adhere to GAAP and aren’t fraudulent

Measuring External Transactions

1. use source documents to identify accounts affected by an external transaction

2. analyze the impact of the transaction on the accounting equation

3. assess whether the transaction results in a debit or a credit to account balances

4. record the transaction

5. post the transaction to the general ledger

6. prepare a trial balance

account

a record of all transactions related to a particular item over a period of time (ex. asset accounts (cash, supplies), liability accounts, stockholders’ equity accounts (common stock, retained earnings).