Accounting

Investors

decide whether to invest in stock

Creditors

decide whether to lend money

Customers

decide whether to purchase products

Suppliers

decide the customer’s ability to pay for supplies

Managers

decide employment oppertunities

Employees

decide employment oppurtunities

Competitors

decide market share and profitability

Regulators

decide on social welfare

Tax authorities

decide on taxation policies

Local communities

decide on environmental issues

Investors, creditors, managers, etc. Make decisions about:

Companies

Companies activities measured by:

Accountants

Accountants communicate information to:

Investors, creditors, managers, etc.

The two primary functions of financial accounting are to:

Measure business activities of a company and to communicate information about those activities for decision-making purposes

Each share of ownership is typically referred to as a:

Share of common stock

Assets

Are the resources of a company (Such as supplies, inventory for sale to customers, buildings, land, and investments)

Liabilities

Are amounts owed to creditors, suppliers, employees, utility companies, and the government (In the form of taxes)

Liabilities typically have claims that must be:

Paid by a specified date

Stockholders’ equity

Represents the owners’ claims to resources

Stockholders’ equity claims rise from two primary sources:

(1.) Contributions by the owners themselves and (2.) net resources generated by company operations

Assets (Resources) =

Liabilities (Creditors claims) + Stockholders’ equity (Owners claims)

Creditors expect to receive only:

Resources equal to the amount owed to them

Stockholders can:

Claim all of the company’s resources in excess of the amount owed to creditors (get whatever is left after the company pays off all its debts)

We calculate a companies profits as the:

Difference between revenues and expenses

Revenues:

Are the amount recognized when the company sells products or provides services to customers.

Expenses:

Are the cost of providing products and services and other business activities during the current period

Net income:

Is the difference between revenues and expenses.

Positive net income:

revenues are greater than expenses

Net loss:

If expenses exceed revenues

Net:

Term used to describe a companies profitability (Or the difference between two amounts)

Dividends:

Cash payments to stockholders (Distributions, most often cash, to the owners of the company AKA the stockholders)

Dividends are NOT:

An expense

Accounting equation:

Assets = Liabilities + Stockholders’ Equity

Net Income equation:

Revenues - Expenses = Net Income

Corporation:

A company that is legally separate from its owners. (Stockholders have limited liability, preventing them from being held personally responsible for the financial obligations of the corporation)

Sole proprietorship:

A business owned by two or more persons (Owners must have sufficient funds to finance the business in addition to the ability to borrow money. Also neither offers limited liability, meaning Owners and partners are held personally responsible for the activities of the business)

A potential disadvantage of a corporation:

A double taxation; (1.) The company first pays corporate income taxes on income it earns and (2.) Stockholders then pay personal income taxes on income distributed to them from the company)

The primary means of communicating business activities is through period reports, known as:

Financial Statements

The 5 primary financial statements are:

Income statement, Statement of stockholders’ equity, balance sheet, statement of cash flows, and statement of comprehensive income (when necessary)

Income statement:

A financial statement that reports the company’s revenues and expenses over an interval of time (e.g. a month, quarter, or year). It shows whether the company was able to generate enough revenue during the period to cover the expenses of running the business. If revenues exceed expenses, then the company reports net income. But if expenses exceed revenues, then the company reports a net loss.

Statement of stockholders’ equity:

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

Statement of stockholders’ equity arises from two primary sources:

Common stock and retained earnings

Stockholders’ equity =

Common stock + Retained earnings

Common Stock:

(external source of equity) represents amounts invested by stockholders (Owners) when they purchase shares of stock

The change in common stock over the period is shown as:

Beginning Common Stock + New Issuances = Ending Common Stock

Retained earnings:

(Internal source of equity) represents all net income minus dividends over the life of the company

The change in retained earnings over the period is shown as:

Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings

Balance Sheet:

A financial statement that presents the financial position of the company on a particular date (Such as the end of the quarter or end of the year).

The financial position of a company is summarized by the accounting equation:

Assets = Liabilities + Stockholders’ Equity

Statement of Cash Flows:

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

We classify all cash transactions into three categories that correspond to the three fundamental business activities:

Operating, Investing, and Financing Cash Flows

Operating Cash Flows:

Include cash receipts and cash payments for transactions involving revenue and expense activities that arise during normal business operations during that period. In other words, operating activities include the cash effects of the same activities that are reported in the income statement to calculate net income. For this reason, the statement of cash flows presents a reconciliation of net income to operating cash flows.

Investing Cash Flows:

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

Long-term Assets:

Are resources owned by a company that are thought to provide benefits for more than one year.

Financing Cash Flows:

Include cash transactions with lenders, such as borrowing money and repaying debt, and with the stockholders, such as issuing stock and paying dividends

The total of the net cash flows from operating, investing, and financing activities equals the change in cash during that period:

Change in cash = Operating Cash Flows + Investing Cash Flows + Financing Cash Flows

Statement of Comprehensive Income:

Measures changes in equity that arise from nonowner sources. Items that can potentially impact comprehensive income include gains and losses associated with investments in certain types of debt securities, certain types of derivatives, pensions, and foreign currency translations.

The financial statements are linked because:

Events that are reported in one financial statement often affect amounts reported in another.

Any transaction that affects the income statement __

Ultimately affects the balance sheet through the balance of retained earnings

Financial accounting also can be describes as a way to:

Tell the financial story of a company

Financial Accounting serves which primary function(s)?

Both Measure business activity and Communicates business activities to interested parties

Resources of a company are referred to as:

Assets

Sales of products or services are referred to as:

Revenues

Amounts owed by the company are referred to as:

Liabilities

Which financial statement conveys a company’s ability to generate profits in the current period?

Income Statement

Which Financial statement shows that a company’s resources equal claims to those resources

Balance Sheet

A company reports the following in its income statement: Total revenues of $500,000 and total expenses of $300,000. Which of the following is true?

Net income equals $200,000.

A company reports the following in its balance sheet: Total assets of $800,000 and total liabilities of $700,000. Which of the following is true?

Total stockholders’ equity equals $100,000.

Why does financial accounting have a positive impact on our society?

It allows investors and creditors to redirect their resources to successful companies and away from unsuccessful companies.

The body of rules and procedures that guide the measurement and communication of financial accounting information is known as:

Generally Accepted Accounting Principles (GAAP).

Financial accounting and reporting standards in the United States are established primarily by the

Financial Accounting Standards Board (FASB).

Cash is always debited when cash is:

Received

Which of the following best describes why financial accounting plays a crucial role in our economy, as discussed in class?

Without financial accounting, potential investors and lenders would be less likely to provide capital to companies, limiting economy-wide growth.

Capital is:

the accumulated financial or physical assets—such as money, machinery, and property—used by businesses to produce goods, services, and income

Which of the following best demonstrates the qualitative characteristic of relevance in the conceptual framework?

Jorge was planning on investing in Microsoft stock but decided not to after reading the company's financial statements.

What does relevance mean in terms of accounting?

Financial information is useful for making decisions because it can influence what users (like investors or lenders) decide to do.

What is conceptual framework?

A set of rules and guiding principles that explains how financial accounting should be done and why.

Accounts Payable is always a:

Liability

Cash is an:

Asset

Supplies are an:

Asset

Prepaid Rent is always an:

Asset

Why is Prepaid Rent always an asset (at first).

You paid cash in advance for rent you haven’t used yet

Salary Expense is:

the cost of paying employees for work already performed.

Equipment is always an:

Asset

Common stock is always a:

Stockholders’ Equity

Retained earnings is always a:

Stockholders’ Equity

Own =

Asset

Owe =

Liability

Owners claim:

equity

When a software company sells a building it no longer needs for more than the building’s book value, the difference is reported as a(n):

gain.

Investing cash flows in the statement of cash flows would include which of the following?

Purchase of land

How would the following transaction affect the accounting equation?

ABC Company receives cash from customers before services are performed. 

Assets increase and liabilities increase

Which of the following transactions would cause an increase in both the total assets and total liabilities of a company?

Purchase of a building by issuing a note payable

What is a note payable?

A written promise to pay back money at a specific time, usually with interest.

Current liability:

due within 1 year

Long-term liability:

due after 1 year

ABC Company purchases custom equipment by paying $95,000. To record this transaction, the company would:

debit Equipment for $95,000 and credit Cash for $95,000

Assets increase =

Debit

Assets decrease =

Credit