Accounting Chapter 1

What is an accounting system?

The collection and processing of financial information about an organization and the reporting of that information to decision makers both INSIDE the business and OUTSIDE the business.

Two ways to finance a company

through stock or through debt (equity financing and debt financing)

the 3 types of business activities

financing, investing, operating

financing

A company needs to acquire money to support its operations

two types of financing

debt financing and equity financing

debt financing

borrowing $$$ from creditors

equity financing

selling stock to investors

investing

• A company needs to purchase resources to run its day-to-day operations.

• Involves acquisitions or dispositions of items such as land, buildings, and equipment.

• Includes investment of cash in the debt and/or equity securities of other companies or municipalities.

operating

• The day-to-day activities of producing and selling a product or providing a service.

• The reason a company exists

In this class, we will focus on the reporting of financial information for current and prospective stakeholders __________ to the business

EXTERNAL

The subset of accounting that provides financial information to external users is called ___________

financial accounting

external users examples

• potential investors and investment professionals

• creditors

• shareholders

• other stakeholders (e.g., customers, suppliers, labor unions, environmental agencies)

quarterly statement

10Q

annual statement

10K

Most businesses have their financial reports audited by an ______________

independent auditor

what do auditors do?

express a professional opinion as to whether the financial statements are fairly presented “in conformity with generally accepted accounting principles”

The subset of accounting that provides information to internal management to aid in their decision making and management of the business is called ______________________

managerial accounting

information provided to internal users includes (but is not limited to):

• cost of products

• estimates of income to be earned from sales campaigns

• cost comparisons of alternative courses of action

• budgets

Because of the strategic nature of the information provided to internal users, it is usually only available to __________________

a company’s top-level management

the accounting process

measuring the economic activity of an entity in monetary terms and communicating results to users

what does the accounting process include?

1) Identifying relevant economic activities of the business

2) Quantifying these activities

3) Recording the resulting measures in a systematic manner

why is the communication of accounting information important?

it must meet the needs of users and help the user interpret the financial results

GAAP (Generally Accepted Accounting Principles)

For financial accounting, statements should be prepared under a set of rules understood by the users of those reports. This allows for comparison across companies and, within the same company, across years.

what are instrumental in developing GAAP>

the Financial Accounting Standards Board (the FASB) and the U.S. Securities and Exchange Commission (SEC)

what is the SEC’s primary focus?

regulation of the interstate sale of stocks and bonds

what does the SEC require companies under its juridisction to do?

submit audited annual financial statements which it then makes available to the public

The SEC has the power to set the accounting principles used by these companies, but the agency has largely delegated that role to ____________

the FASB

FASB

a nongovernmental entity whose pronouncements establish GAAP

what does the FASB consist of?

a seven-member board and follows a process that allows for input from interested parties when it is considering a new or a changed accounting principle

what was established after the fall on Enron?

Public Company Accounting Oversight Board (PCAOB)

what does the PCAOB do?

audits the auditing of public companies’ financial statements

sources of financial resources

stockholders/shareholders and creditors/lendors

potential return for stockholders

• dividends

• higher future stock prices/price appreciation

what are dividends?

money (share of the company’s profits) that a company gives back to its shareholders

portential return for creditors

interest

which source of financial resources only has downside risks?

creditors

which source of financial resources has upside + downside risks?

stockholders

______ get payed back before shareholders get anything

creditors

what are stockholders called?

“residual claimants”

what is a balance sheet?

A listing of a firm’s assets, liabilities, and shareholders’ equity as of a given date, usually the end of an accounting period. It depicts a framework called the accounting equation

balance sheet formula

assets = liabilities + shareholders equity OR resources of company = claims on resources

assets

economic resources of a business than can be expressed in monetary terms

liabilities

the obligations or debts that a business must pay in cash or in goods and services at some future time as a consequence of past transactions or events

are liabilities always paid back in cash?

No, they can be paid back in services (unearned income)

shareholders equity

• the ownership (shareholder) claims on the assets of the business

• represents a residual claim on a business’ assets

• a claim on the assets that remain after all liabilities to creditors have been satisfied

what is shareholders equity sometimes referred to as?

a business’s net assets

income statement

Reports results of operations for a given time period, usually a quarter or a year. The income statement lists the revenues and expenses of the business.

sales revenue

increases to the company’s resources that result when goods or services are provided to customers

expenses

decreases in a company’s resources from generating revenues

more cost or expenses than revenue means a ________

net loss

income statement formula

revenues - expenses = net income

when revenue exceeds expenses, the resulting amount is called a ________

net income

The Statement of SHE consists of two parts – _____________________________

contributed capital and earned capital

contributed capital

a measure of the capital contributed by shareholders of the company when they purchase ownership in the company

earned capital

a measure of the capital that is earned by the company, reinvested in the business, and not distributed to its shareholders as a dividend

retained earnings

increased by net income, and decreased by a net loss. Retained earnings also decrease when a company pays a dividend to its shareholders

statement of cash flows

Reports a business’s cash inflows and cash outflows during a given period of time

Cash flows are grouped into three business activities: __________________

Operating, Investing, and Financing

operating cash flows

Includes the cash received from the sale of goods and the cash spent on operating expenses.

investing cash flows

Includes cash payments and receipts from the business of buying and certain assets that it uses in its operations

financing cash flows

Includes the issuance and repurchase of the business’s own shares and the amounts borrowed and repaid to creditors

three of the statements present information covering a specific period of time, which are they?

1. the income statement

2. the statement of shareholders equity

3. the statement of cash flow

which statement presents information as of a specific date?

balance sheet