Chapter 1 - Frameworks of Financial Accounting

Primary Functions of Financial Accounting

1. MEASURE company activities

2. COMMUNICATE activities to investors, creditors, and the general public

GAAP

Generally Accepted Accounting Principles

(Set by the FASB)

FASB

Financial Accounting Standards Board

(Sets the U.S. accounting standards, ensuring statements are consistent, accurate, and comparable, allowing investors, creditors, and other stakeholders to make informed decisions)

Income Statement + Equation

Financial Statement that sums Revenue and Expenses and covers an interval of time

(Revenues - Expenses = Net Income)

Types of Expenses

Rent, Salary, Utilities, Insurance, Taxes

(Found in Income Statement)

Revenue

Sales of products or services in a company

(Found in Income Statement)

3 Types of Business Activities

1. Operating

2. Investing

3. Financing

(Statement of Cash Flows)

Operating Activities

Transactions involving Providing products and services, Salaries, Utilities, Tax, Insurance

(Everyday business activities involving Rev. and Exp.)

Investing Activities

Transactions involving Investments and Long-term Assets

(Think long-term and general investing)

Financing Activities

Transactions involving Borrowing, Issuance of Common Stock, Paying Dividends

(Stockholder's Equity)

Balance Sheet

Financial statement showing Assets, Liabilities, and Stockholders' Equity

(Accounting Equation)

Assets (The Accounting Equation)

Property with value, owned by the company; goes on the BALANCE SHEET

(Assets = Liabilities + Stockholders' Equity)

Liabilities (Payables)

Amounts OWED that must be settled in future payment of cash, services, or other benefits

(Found on the Balance Sheet)

Statement of Stockholders' Equity

Details the changes in a company's equity over a period of time

(Common Stock, Retained Earnings, and Dividends)

Stockholders' Equity + Equation

Owner's CLAIMS in the company

(Common Stock + Retained Earnings)

Retained Earnings

Accumulated profit not yet paid to Stockholders

(Beginning R|E + Net Income/Loss - Dividends = Ending R|E)

Dividends

Distribution of earnings to Stockholders

(Found in Retained Earnings)

Statement of Cash Flows

Tracks the movements of cash in and out of a business; categorized in 3 types of activities

Corporation

An organization where an entity is separate from its owners (Limited Liability)

Sole Proprietorship

A business owned by one person (Unlimited Liability)

Partnership

A business owned by two or more people (Unlimited Liability)

Relevance (Decision Usefulness)

Accounting information that possesses confirmatory value and/or predictive value, and that is material

Confirmatory Value (Relevance)

Information that CONFIRMS or corrects previous expectations

Predictive Value (Relevance)

Information that can help PREDICT future values or company performance

Materialality

Reflects the impact of financial accounting info on investor's and creditor's decisions

(Does a single stapler need to be included?)

Faithful Representation (Decision Usefulness)

Accounting information that is complete, neutral, and free from error

Completeness (Faithful Representation)

Including ALL information for Faithful Representation of the business activity being reported

The 4 Enhancing Qualitative Characteristics

Comparability, Consistency, Verifiability, Timeliness

Comparability

The ability of users to see similarities and differences between two different business activities

Consistency

The use of similar accounting procedures either over time for the same company, or across companies at the same point in time

Verifiability

A consensus among different measurers

Timeliness

Information being available to users early enough to allow them to use it in the decision process

Underlying Assumptions

Economic Entity, Monetary Unit, Periodicity, Going Concern

Economic Entity

All economic events with a particular economic entity can be identified (Only business transactions involving Company A should be reported as apart of Company A's FA info)

Monetary Unit

A unit or scale of measurement can be used to measure financial statement elements ($$$)

Periodicity

The economic life of an enterprise (presumed to be indefinite) can be divided into artificial time periods for financial reporting (Quarterly, Annual)

Going Concern

In the absence of information to the contrary, a business entity will continue to operate indefinitely