D196 Unit 1

Luca Pacioli

The 15th century “father of accounting”; created double-entry system of accounting

Double-Entry Accounting

A system that records both sides of the transaction; what is received and what is given in exchange

Bartering

Exchange of goods or services without using money

Capital

Money or resources used to operate or expand a business

Capital market

A market where businesses and other entities raise funds from investors

Liabilities

Debts and obligations a company owns

Why did investors need financial statements?

To evaluate a company’a performance, financial position, risks, and potential investment returns

What is the purpose of the Securities Exchange Act of 1934?

To regulate securities trading, establish the SEC, and require ongoing disclosures by public companies

What did the Sarbanes-Oxley Act of 2002 do?

Strengthened oversight of public-company financial reporting, executive accountability, internal controls, and external audits

Public Company Accounting Oversight Board (PCAOB)

Oversees audits of public companies and inspects registered public accounting firms; audits the auditors

American Institute of Certified Public Accountants AICPA

Develops professional guidance and is the primary standard setter for private-company audits

Federal Accounting Standards Board (FASB)

Establishes U.S. GAAP for nongovernmental entities

Governmental Accounting Standards Board (GASB)

Establishes accounting and financial reporting standards for U.S. state and local governments

International Accounting Standards Board (IASB)

Issues International Financial Reporting Standards (IFRS) used in many countries

Internal Revenue Service (IRS)

Administers federal tax laws; tax accounting rules differ from financial accounting rules

GAAP

Generally Accepted Accounting Principles; primarily financial accounting standards used by U.S. companies

Dodd-Frank Wall Street Reform and Consumer Protection Act

Law that follows the 2007-2008 financial crisis and was enacted in 2010

6 principles of the AICPA Code of Professional Conduct

Responsibilities

Public interest

Integrity

Objectivity and Independence

Due care

Scope and nature of services

Accounting Equation

Assets=Liabilities+Owner’s equity; Assets-liabilities=owners equity; assets-owners equity=liabilities

Balance sheet

A financial statement that reports a company’s financial position at a specific point in time; shows assets, liabilities, and owners equity

Assets

What the company owns or controls; economic resources used to generate revenue

Liabilities

What the company owes; obligations to pay money or provide goods/services

Owners’ equity

The owners’ claim; the portion of assets financed by owners and accumulated earnings retained in the business

Common types of assets

Cash, accounts receivable, inventory, and land/buildings/equipment

Common types of liabilities

Accounts payable, taxes payable, mortgage payable, unearned revenue

2 components of owners’ equity

Capital stock and retained earnings

Gross profit formula

Sales-COGS=gross profit

Net income formula

Revenue - all expenses = net income

Net income formula

Revenue - all expenses = net income

Earnings per share formula

Net income over number of shares outstanding

3 components of the statement of cash flow

1.operating activities

2.investing activities

3.financing activities

3 main components of the income statement

Revenue, expenses, and net income or net loss

What is the matching principle

Recognize expenses in the same period as the related revenues when possible

What is the purpose of the statement of owners equity

To explain changes in owners investments and retained earnings during a period

What are the 3 primary financial statements?

Balance sheet, income statement, and statement of cash flow