Financial Accounting

Accounting information provided to external users;

The “two” functions of accounting (financial)

measure business activity of a company & to communicate those measurements to external parties for decision-making purposes

Financing Activities

Transactions the company has with investors and creditors

Investing Activities

transactions involving the purchase & sale of resources that are expected to benefit the company for several years (long-term)

Operating Activities

(cash) transactions that relate to the primary operations of the company; meaning customers

Corporation

Company legally separate from its owners; stockholders have limited liability

Sole proprietorship

Business owned by one person.

Partnership

Business owned by two or more people.

Assets equation (accounting equation)

Assets = Liabilities + Stockholders’ Equity

What are Assets?

Total resources of the company

Liabilities

Amounts owned to creditors

Stockholders’ Equity

Owners’ claim to resources

Revenues

The amount recognized when the company sells products/provides services to customers

Expenses

The costs of providing products, services & other business activities during the current period

Net income

The difference between revenues & expenses (i.e. profit/earnings)

Dividends

Cash payments to stockholders (not expenses!)

Financial Statements

Periodic reports published by the company to provide information to external users.

Types of financial statements

Income statement, balance sheet, cash flow statement & stockholders’ equity statement.

When is there net income?

If revenue > expenses

When is there net loss?

When revenue < expenses

Stockholders’ Equity equation

Stockholders’ Equity = Common Stock (external) - Retained Earnings (internal)

What are dividends not?

They aren’t expenses! a distribution of net incomepaid to shareholders from retained earnings.

Balance Sheet

Presents the financial position of the company on a particular date

2 important components of the annual report?

management discussion & analysis (MD&A) and Note disclosures

Management Discussion & Analysis (MD&A)

Management’s views on significant events, trends, and uncertainties pertaining to the company’s operations and resources.

Note disclosures

Additional information to explain the information presented in the financial statements or to provide information not included in the financial statement.

What are the rules of financial accounting called?

Generally Accepted Accounting Principles

(GAAP)

Global standard for accounting is known as?

International Accounting Standards Board (IASB)

Organization for accounting standards in the US is known as?

Financial Accounting Standards Board (FASB); Governed by the SEC

What is the role of auditors?

Ensure that management properly applies GAAP in financial statements & adding credibility to the financial statements for creditors and investors.

Four characteristics of financial reporting?

comparability, verifiability, timeliness & understandability

What do accountants do?

Communicate information to investors & creditors based on measuring information from companies

What do investors & creditors do?

Make decisions about companies based on financial information

Other names for an income statement?

profit and loss statement, statement of earnings, & statement of operations

What is common stock equal to?

Ending common stock = Beginning common stock + New issuances

Retained Earnings equation

Ending retained earnings = Beginning retained earnings + Net income - Dividends

What must be true in the case of assets on the balance sheet?

Total assets must equal total liability & stockholders’ equity

Another name for a balance sheet would be?

Statement of Financial Position

External transactions

Transactions between the company and a separate company or individual

Internal transactions

Transactions that don’t include an exchange with a separate economic entity

Six steps to measure 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. Asses whether the transaction results in a debit or credit to account balances

4. Record the transaction in a journal using debits and credits

5. Post the transaction to the general ledger

6. Prepare a trial balance

What is an Account?

Record of all transactions related to a particular item over a period of time

Types of accounts

Asset, Liability & Stockholders’ Equity Accounts

Asset Accounts

Examples: Cash, Supplies, & Equipment

Liability Account Examples:

Accounts Payable, Salaries Payable, Utilities Payable, & Taxes Payable

Stockholders’ Equity Account Examples

Common Stock & Retained Earnings

Chart of Accounts

List of all account names used to record transactions

Debits Effects on account?

Increase assets, decrease liabilities and decrease stockholders’ equity

Credits effects on accounts?

Decrease assets, increase liabilities and increase stockholders’ equity

Retained Earnings account

Stockholders’ equity account that normally has a credit balance; has three components: revenues, expenses and dividends

What does debit mean?

Left side

What does credit mean?

Right Side

Common mistake in journal entries

Don’t forget to indent the credit account names

In every transaction what must be equal?

Total debits = total credits

What does an asset account normally have?

Debit balance meaning the asset account increases

What does a credit account normally have?

Credit balance meaning it increases the accounts balances

What is posting?

Process of transferring the debit and credits Post information from the journal to individual general ledger accounts

General ledger

Provides each account with its individual transactions and resulting account balance in a single collection

T-account

Simplified version of a general ledger account