Accounting Chapter 1

accounting

a system of maintaining records of a company’s operations and communication that information to decision makers

financial activities

transactions the company has with investors and creditors

investing activities

buying/selling resources to benefit the company for many years

assets

resources of a company

important note: cash is an asset

liabilities

amounts owned to creditors

stockholders equity

owner’s claim to resources which come from contributions by the owners and net resources generated by company operations

accounting equation

assets = liabilities + stockholders’ equity

resources = claims to resources

revenues

amounts recognized when the company sells products and services

expenses

costs of providing products and services

net income

difference between revenues and expenses

negative amount → net loss

dividends

cash payments to stockholders

corporation

a company that is legally separate from its owners

the advantage of being legally separate is that the stockholders have limited ability

disadvantage: double taxation - company first pays corporate income taxes on the income it earns, and stockholders then pay personal income taxes when the company distributes that income as dividends to them

sole proprietorship

business owned by one person

no limited ability

partnerhsip

business owned by two or more people

no limited ability

financial statements

periodic reports published by the company for the purpose of communicating a company’s business activities to those outside of the company

primary financial statements: income statement, statement of stockholder equity_, balance sheet, statement of cash flows

income statement

financial statement that reports the company’s revenues and expenses over an interval of time

revenues > expenses is a net income

revenues < expenses then net loss

components: revenues, expenses, net income

statement of stockholders equity

financial statement that summarizes the changes in stockholders equity over an interval of time

stockholder equity = common stock + retained earnings

components: beginning balance, issuance of common stock, add or less: net income for the period, add or less: dividends, ending balance

financial accounting

measure business activities of a company and then communicate those measurements to decision makers outside of the company

common stock

amounts invested by stockholders when they purchase shares of stock

beginning common stock + new issuances = ending common stock

retained earnings

all net income minus all dividends over the life of the company

beginning retained earnings + net income - dividends = ending retained earnings

balance sheet

financial statement that presents the financial position of the company on a particular date

resources = claims to resources

assets = liabilities + stockholders’ equity

components: assets, total assets, stockholders equity, liabilities, total stockholders equity and liabilities

operating activities

transactions related to the primary operations of the company, such as providing products or services to customers and the associated costs of doing so, like rent, salaries, taxes, utilities, and advertising

statement of cash flows

measures activities involving cash receipts and cash payments over an interval of time

components: financing cash flow, operating cash flow, investing cash flow

Generally Accepted Accounting Principles (GAAP)

investors and creditors → make their decisions based on → financial accounting information → should be based on formal standards

Financial Accounting Standards Board (FASB)

an independent, private body that has primary responsibility for the establishment of GAAP in the United States

Auditors

trained individuals hired by a 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 misstatement

economic entity principle

all economic events with a particular economic entity can be identified

periodicity principle

economic life of an enterprise (presumed to be indefinite) can be divided into artificial time periods for financial reporting

monetary unit principle

a unit or scale of measurement can be used to measure financial statement elements

SEC

accounting and disclosure requirements for the issuance and sale of securities (stocks and bonds) to the public

SEC overseas and enforces this in the US

going concern assumption

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

relevance

accounting information that possesses confirmatory value and or predictive value, and that is material

faithful repersentation

accounting information that is complete, neutral, and free from error