Financial Accounting McGraw-Hill chapter 1

accounting

a system that collects and processes financial information about an organization's business activities and reports that information to decision makers

financing activities

borrowing or paying back money to lenders and receiving additional funds from stockholders or paying them dividends

Investing Activities

buying or selling items such as plant and equipment used in the production of beverages

Operating Activities

the day-to-day process of purchasing raw materials and other ingredients from suppliers, manufacturing beverages, delivering them to customers, collecting cash from customers, and paying suppliers

management accounting

developing accounting information for internal decision makers

supply chain managers

analyze suppliers' financial statements to see whether the suppliers have the resources to meet demand and invest in future development

Financial Accounting

The field of accounting that focuses on providing information for external decision makers

human resource managers

use financial statements as a basis for contract negotiations over pay rates

balance sheet

reports in dollar amounts the financial position (amount of assets, liabilities, and stockholders' equity) of an accounting entity at a particular point in time

heading of a balance sheet contains

1. name of the entity

2. title of the statement (Balance Sheet)

3. specific date of the statement

4. unit of measure

Basic Accounting Equation

Assets = Liabilities + Stockholders' Equity

accounting entity

the organization for which financial data are collected

financial position

the economic resources that the company owns and the sources of financing for those resources

assets

economic resources owned by the entity

Accounts Receivable

promises to pay (collected in cash later)

how are assets on balance sheets measured

at the total cost incurred to acquire it

liabilities

indicate the amount of financing provided by creditors (company's debts or obligations)

accounts payable

purchase of goods or services from suppliers on credit without a formal written contract (or note)

notes payable to banks

result from cash borrowings based on a formal written debt contract with banks

stockholders' equity

the amount of financing provided by owners of the business and reinvested earnings

common stock

the investment of cash and other assets in the business by the stockholders

retained earnings

the amount of earnings (profits) reinvested in the business (not given to stockholders as dividends)

total stockholder's equity

sum of the common stock plus the retained earnings

importance of assets

provide basis for judging whether a company has sufficient resources available to operate and they could be sold for cash in event that company goes out of business

who receives money first if company goes out of business and assets are sold?

creditors' claims legally come before those of the owners and come before paying back stockholders

income statement

reports the accountant's primary measure of performance of a business, revenues less expenses during the accounting period (net income)

heading of an income statement

1. name of the entity

2. title of the report (income statement)

3. unit of measure

4. specified period of time (ex: month of December)

accounting period

the time period covered by the financial statements

income statement equation

revenues - expenses = net income

revenues

cash and promises received from delivery of goods and services

expenses

resources used to earn period's revenues (expenses reported in one accounting period may actually be paid for in another accounting period)

net income (net earnings, bottom line)

excess of total revenues over total expenses

does net income equal the net cash generated by operations?

no - because revenues are not necessarily the same as collections from customers and expenses not necessarily the same as payments to suupliers

statement of stockholders' equity

Reports the way that net income and the distribution of dividends affected the financial position of the company during the accounting period.

statement of stockholders' equity heading

1. name of entity

2. title of report (statement of stockholders' equity)

3. unit of measure used in the statement

4. specified period in time

retained earnings

reports the way that net income and the distribution of dividends affected the company's financial position during that accounting period

calculate statement of stockholders' equity

beginning of the year retained earnings + net income - dividends = end of year retained earnings

retained earnings portion of statement of stockholders' equity indicates

the relationship of the income statement to the balance sheet

why do investors examine retained earnings?

to determine whether the company is reinvesting a sufficient portion of earnings to support future growth

statement of cash flows

reports inflows and outflows of cash during the accounting period in the categories of operating, investing, and financing activities

heading of statement of cash flows

1. name of entity

2. title of the report (cash flow statement)

3. unit of measure

4. specified period of time (accounting period)

CFO

cash flows from operating activities, cash flows directly related to earning income, ex: when customers pay for beverage from a beverage company, the company lists the amounts collected as cash collected from customers

CFI

cash flows from investing activities, cash flows from purchase of plant, equipment, and other investments

CFF

cash flows from financing activities, cash flows from investors and creditors

cash flow statement equation

+/- CFO

+/- CFI

+/- CFF

= change in cash

+beginning cash balance

= ending cash balance