Accounting: Chapter 1

For what fundamental purpose do we keep records?

For what fundamental purpose do we keep records?

To help make business decisions

Retained earnings represent an asset to the firm.

False

Recordkeeping promotes trust and reduces the risk of loss from exchanging with strangers

True

Accounting is not vital to the development of human civilization

False

We use managing accounting information to evaluate management performance

False

What is marketing?

collected knowledge and best practices of creating relationships

One characteristic of an asset is:

it provides expected future benefits

As shown in the syllabus, what is the main action of the Group Project?

Analyze publicly traded companies

Fundamental Demand For Accounting is___________

to help guide exchange

Accounting is ___________

an evolved economic institution

A bill of lading is a document issued by a(n) __________.

carrier

Which of the following documents is a primary source of accounting data (assets, liabilities, equity, revenues, expenses)?

Lease agreement

Workload refers to the volume of goods or services the organization will provide

True

A difference between a personal and a business budget is only a personal budget will help you stay on-track with long-range goals.

False

Which of the following indicates the capital structure of a firm?

Debt-to-equity ratio

Which of the following is a benefit of debt relative to equity?

Lower cost of capital

More than half of CEO compensation is now comprised of _____________.

stock options

A business plan should help you assess whether the proposed venture is sensible

True

What is the first step in budget preparation?

completion of an environmental statement

What does a strategic plan define?

broad set of goals for the organization

How much did I sell last year

Helps decide how much wheat to grow this year

How much wheat do I own right now?

Helps identify the scale of possible transactions

Was this customer a reliable exchange partner in the past

Helps identify whether you should continue doing business with that customer

Who you can and cant trust

Why do we need recordkeeping

• Humans are fallible – our memory storage is finite

• Recordkeeping supplements memory as exchange between strangers becomes common

How does recordkeeping promote exchange

• Recordkeeping improves our memory of past interactions in a complex exchange environment, which promotes reputation formation (you can develop a reputation for trustworthiness*)* and cooperation

• Recordkeeping promotes trust and reduces the risk of loss from exchanging with strangers

KEY: Before we had laws protecting property and contract rights, trust yielded implicit contracts that are self-reinforced

Recordkeeping (i.e., accounting) has a central role in expanding the scale, scope, and complexity of human exchange

Which is the ultimate source of human Economic development.

“For the first time in our history, we had more stuff than we could carry.  We needed a way to keep track of it.”

• Writing?  Recordkeeping → Accounting

• Accountants invented writing!  [Numbers pre-date words]

Accounting is…

• NOT just a series of rules

• NOT just Debits and credits

Accounting is an evolved economic institution

Vital to the development of human civilization Vital to humans’ recent economic development

Accounting is…

• The process of recording, summarizing, and analyzing financial transactions

• To help people make Economic decision (business decisions)

• SUMMARY: A system for providing financial information

Managerial Accounting:

1. designed primarily for decision-makers within the company

   • Demand arises as soon as the business is formed

   • Remember our “exchange guidance” discussion!

Financial Accounting:

designed primarily for decision-makers outside the company

• Demand arises in a later stage of business development

Managerial Accounting

• Looks forward – the future

• Provides information for improving decisions

• Internal users only: for the firm’s managers

Financial Accounting

Looks backward – the past

Reports what has happened to external users

via annual and quarterly financial reports called financial statements

Corporations can issue shares of stock to raise equity capital, separating ownership from control

Stockholders: Owners of the corporation, not usually involved in day-to-day business decisions

Residual Claimants:

owners hold a residual claim

Use financial accounting accounting information to evaluate management performance, to assess the company’s financial condition, and to predict future success

• (non-managers have no access to internal company data, no access to managerial acct info)

Board of Directors:

• Represents shareholder interests, hire & oversee management

Creditors (lenders)

• Companies can also borrow (from a bank or another source) to raise credit capital

  • Use financial information to Assess Creditworthiness

Suppliers

• Companies that supply you with raw material that you use in your business

  • Use financial information to assess creditworthiness

• Potential investors

• Individual investors, institutional investors, also credit rating agencies and security analysts (environment)

  • Use financial information to assess investment risk and expected Investment Returns

• The nature of business – the economic process businesses follow – is to:

1. Obtain Capital

2. Make investments

3. Generate a future return

Corporate finance

informs capital acquisition/maintenance

Managerial accounting

• informs investment decisions

Financial accounting

measures the returns

• What is marketing?

Informally: collected knowledge and best practices of Creating relationships with and satisfying customers

What is management?

Informally: collected knowledge and best practices of setting the _strategy of an organization and coordinating the efforts of its employees

What is financial accounting?

Informally: collected knowledge and best practices for evaluating the financial performance of a company