BMGT220 - Chapter 1: A Framework for Financial Accounting

Accounting

The language of business
- A system of maintaining records of a company's operations and communicating that information to decision makers

Accountants

Measure the activities of the company and communicate those measurements to others

Managerial accounting

Accounting information that is provided for internal users (managers)

Financial Accounting

Accounting information that is provided to external users

Creditors

Make decisions related to lending money to the company

Financing Activities

Transactions the company has with investors and creditors, such as issuing stock and borrowing money from a bank

Investing Activities

Transactions involving the purchase and sale of resources that are expected to benefit the company for several years, such as the purchase of equipment

Operating Activities

Transactions that relate to the primary operations of the company such as providing products and services to customers and the associated costs of doing so, like rent, salaries, utilities

Corporation

A company that is legally separate from its owners

Limited Liability

Prevents stockholders from being held personally responsible for the financial obligations of the corporation

Sole Proprietorship

A business owned by one person

Partnership

A business owned by two or more persons

Double Taxation

1. The company first pays corporate income taxes on income it ears
2. Stockholders then pay personal income taxes when the company distributes that income as dividends

Assets

The total resources of a company

Liabilities

Amounts owed to creditors
- money owed to the bank
- amounts owed to suppliers, employees, utility companies, the govt (tax)

Stockholders' equity

The owners' claims to resources
1. Contributions by the owners themselves
2. Net resources generated by company operations

Revenues

The amounts recognized when the company sells products or provides services to customers

Expenses

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

Net Income

The difference between revenue and expenses
- we want revenue to be more than expenses for a positive income

Dividends

Cash payments to stockholders
- Not an expense: they are distributions to the owners of the company (stockholders)

Financial statements

Periodic reports published by the company for the purpose of providing information to external users
1. Income Statement
2. Statement of stockholders' equity
3. Balance sheet
4. Statement of cash flows

Income statement

A financial statement that reports the company's revenues and expenses over an interval of time
Revenues - Expenses = Net Income
Common Names: Statement of operations, statement of income, profit and loss statement

Parts of an Income Statement

1. Heading
2. Revenues
3. Expenses
4. Net Income
5. Underlines

Statements of stockholders' Equity

A financial statement that summarizes the changes in stockholders' equity over an interval of time
- two primary sources: common stock and retained earnings

Common stock

(external source of equity) represents amounts invested by stockholders when they purchase shares of stock
Beginning common stock + new issuances = Ending Common Stock

Retained earnings

(internal source of equity) represent all new income minus all dividends over the life of the company
Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings

Balance Sheet

A financial statements that presents the financial position of the company on a particular date

Assets

? = Liabilities + Stockholders' Equity

Accounts receivable

Asset - represent the right to receive cash from customers that have already been provided products or services

Equipment

A resource that can be used to provide services to customers

Statement of cash flows

A financial statement that measures activities involving cash receipts and cash payments over an interval of time

Operating cash flows

Cash receipts and cash payments for transactions involving revenue and expense activities during the period

Investing Cash Flows

Generally include cash transactions for the purchase and sale of investments and long-term assets

Long-term assets

Resources owned by a company that are thought to provide benefits for more than one year

Financing cash flows

Transactions with lenders such as borrowing money and repaying debt, and with stockholders, such as issuing stock and paying dividends

Annual Report

A term most often used to describe the formal document detailing a company's activities and financial performance

Management discussion and analysis (MD&A)

Includes management's views on significant events, trends, and uncertainties pertaining to the company's operations and resources

Generally Accepted Accounting Principles (GAAP)

Rules of financial accounting

Financial Accounting Standards Board (FASB)

An independent, private-sector body with full-time voting members and a very large support staff

International Accounting Standards Board (IASB)

A project whose goal is to eliminate differences in accounting standards around the world

Securities and Exchange Commission (SEC)

A governments agency that requires companies to publicly trade their stock to prepare periodic financial statements for distribution to investors and creditors

Auditors

Hired by the company as an independent party to express a professional opinion of the extent to which financial statements are prepared in compliance with GAAP and are free of material misstatements
- Play a major role in investors' and creditors' decisions by adding credibility to a company's financial statements

Public Company Accounting Oversight Board (PCAOB)

Ensures that auditors follow a strict set of guidelines when conducting their audits of public companies' financial statements

Ethics

Refers to a code or moral system that provides criteria for evaluating right and wrong behavior

Sarbanes-Oxley Act (SOX)

Provides for the regulation of auditors and the types of services they furnish to clients, increases accountability of corporate executives, addresses conflicts of interest for securities analysts, and provides for stiff criminal penalties for violaters

Public accounting firms

Professional service firms that traditionally have focused on three areas: auditing, tax preparation/planning, and business consulting

Private Accounting

Providing accounting services to the company that employs you

Economic entity assumption

This assumption states that we can identify all economic events with a particular economic entity

Monetary Unit Assumption

In order to measure financial statement elements, we need a unit or scale of measurement

Periodicity Assumption

Divides the economic life of an enterprise into artificial time periods for periodic financial reporting

Going concern assumption

States that in the absence of information to the contrary, a business entity will continue to operate indefinitely