ACC 201 Flashcards

Financial Accounting

Process of measuring business activities of a business organization in monetary units and communicating the results to external users

• This is not budgeting; it is everything in the past

• For external users, make sure government following laws, taxes and for public info

Purpose of Financial Accounting

• Identify the relevant business activities

• Measure the impact of those activities

• Record the results

• Report the results

Business Organizations

Accounting comes into play once a business organization is established

To Start a Business

• Idea generation and market research if there is demand for the product or service

• Business plan to outline the vision, goals, and strategies of the business

• Choose appropriate legal structure (sole proprietorship, partnership, corporation) and registering the business

• Fund the business

• Launch and grow the business

• Measure and report results

Sole Proprietorship

• Most common form of business

• Owned by one person

• Advantages: easiest to form; tax advantages; sole owner controls the business

• Disadvantage: unlimited liability

Partnership

• A business owned by two or more people

• Advantages: relatively easiest to form; tax advantages; broader skill set

• Disadvantage: unlimited liability

Corporation

• A separate legal entity. The owners of the corporation are the stockholders. Can be private or public

• Advantages: easiest to raise capital; easiest to transfer ownership; limited liability

• Disadvantages: harder to form; doable taxation

Financial Accounting is a…

Private business

Corporations - Going “Public”

• Transitioning from private to public ownership is to raiser capital

Business Activities

• Financing Activities

• Investing Activities

• Operating Activities

Financing Activities

• Debt Financing: taking out a loan, getting cash from the bank

• Equity Financing: goes through IPO when company sells a stock

Investing Activities

• Always associated with a purchase

Operaring Activities

• Paying employees, electric bill, selling a product, COGS, supplies, buying inventory, etc.

Financial Accounting and its Users

• External Users

  • Investors, creditors, regulators

Investors Purpose

• how well a company’s financial performance is

• profits, revenues, losses, break-even, income statement

Creditors Purpose

• financial performance of a company

  • balance sheet, debt of a company, liquidation

Regulators Purpose

• profitability

  • taxes, cheating + disclosures, SEC

Generally Accepted Accounting Principles (GAAP)

• External users (EU) rely on accountants to prepare and interpret financial reports

• EU need to be able to compare the financial statements of various publicly traded companies and make decisions

• Publicly traded companies must follow the same rules

• GAAP are the standards and procedures publicly traded companies follow to prepare their financial statements

Financial Accounting Standards Boards (FASB)

Establishes GAAP

Securities and Exchange Commision (SEC)

Requires publicly traded corporations to submit audited financial statements which are released to the public

Public Company Accounting Oversight Board (PCAOB)

Approves auditing standards, known as Generally Accepted Auditing Standards (GAAS)