Procopy Concepts Financial Accounting chapter 1

Accounting

An information system that measures, processes, and communicates financial information about an identifiable economic entity. It is the link between business activities and decision makers.

Financial Accounting

Used by external decision makers, communicates financial information (financial statements), highly summarized, must adhere to Generally Accepted Accounting Principles (GAAP)

Managerial Accounting

Used by internal decision makers only, includes more detailed information, specific to management's needs, does not have to follow GAAP.

Profitability

The ability to earn enough income to attract and keep investment capital.

Liquidity

Have enough cash available to pay debts when they are due.

Sole Proprietorship:

Only ONE owner, controlled apart from from his or her personal interests but not a separate legal entity, is not incorporated.

Partnership

Two or more owners, controlled apart from the partners personal interests but not a separate legal entity, is not incorporated.

Corporation

A business unit that is granted a state charter and is recognized as a separate legal entity, owners are stockholders but do not generally run the day to day operations.

Main goals of businesses

profitability and liquidity

Forms of business organizations

sole proprietorship, partnership, corporation

Types of Business Activities

Operating Activities, Investing Activities, Financing Activities

Operating Activities

Includes all cash inflows and outflows related to the normal operations of a business.

Examples of Operating Activities

Selling goods and services, paying normal operating expenses, employing workers, paying taxes

Investing Activities

includes all cash inflows and outflows related to the acquisition or sale of productive resources that will help the business achieve its goals and objectives

Examples of Investing Activites

Buying or selling of land, buildings, equipment, and other resources used in the operation of the business.

Financing Activities

Cash inflows and outflows related to external sources of funding (capital) for the business.

Examples of Financing Activites

Obtaining funding from creditors or owners, and repaying creditors or paying a return( dividend) to owners.

Management

Those responsible for operating the business, meeting profitability and liquidity goals.

Direct Financial Interest

Depend on accounting information to report how the business has performed, as an indicator of how it will do in the future. (Investors and Creditors)

Indirect Financial Interest

Depend on accounting information to help make decisions on public issues (tax authorities, regulatory agencies, financial advisors, lawyers, customers, suppliers)

The accounting equation

Assets = Liabilities + Owner's Equity

Assets

Economic resources owned by a business or expected to benefit the business in the future

Liabilities

Any obligations (debts) of a business to pay cash, transfer assets, or provide a service to another entity in the future.

Equity

The residual interest in the business; claims by the owners to the assets of the business after all obligations have been satisfied.

Four types of transactions that affect equity

Owner investments, owner withdrawals, revenues, expenses

Owner Investments

Assets are contributed to the business by its owner(s)

Owner withdrawals

Assets are withdrawn from the business by its owner(s)

Revenues

Increases in equity as a result of operations of a business (sales)

Expenses

Decreases in equity (resources used to help earn revenues)

Balance Sheet

Communicates the financial position of a business on a certain date, usually at the end of a month or the end of a year. Assets= Liabilities+ Owner's Equity

Income Statement

Summarizes the revenues earned and expenses incurred by a business over a period of time (month, quarter, or year) Revenues- Expenses= Net Income

Statement of Retained Earnings/ Owner's Equity

Illustrates change in owner's equity (retained earnings) over a period of time.

Statement of Cash Flows

Illustrates the cash inflows (+) and cash outflows(-) of cash into and out of business over a period of time.

Management Certification

Management is primarily responsible for information presented in the financial statements.

Audit report

Certified public Accountant is responsible for providing an opinion as whether the information in the financial statements is fairly presented

Generally Accepted Accounting Principles (GAAP)

Developed to provide guidelines for financial accounting practices

FASB

Financial Accounting services board (establishes GAAP today)

SEC

Securities and Exchange Commission (determines financial statement rules for public companies)

PCAOB

Public company accounting oversight board ( auditing standards)

AICPA

American Institute of Certified Public Accountants: Professional Association of CPA's

IASC

International Accounting Standards Board: Developing international accounting standards

Assets

Economic resources that will provide future economic benefits to the company as a result of a past transaction or event. Listed in order of liquidity

Liabilities

Probable debts or obligations (claims against company resources) as a result of a past transaction or event. Listed in order of maturity (when the debt is due)

Stockholder's Equity

Also called owner's equity or capital (if a sole proprietor or partnership): is the residual interest in the business (whatever left in assets after debts have been paid).

Sole Proprietorship

Capital, withdrawals (like a dividend)

Partnership

Capital Account for each partner, withdrawals

Corporation

Common stock, Additional Paid in Capital, Retained Earnings

Chart of Accounts

A listing of all account titles and their general ledger codes

General Ledger

All information in the chart of accounts is accumulated together into one book