Chapter 1 - Financial Accounting and Business Decisions

  • Forms of Business Organizations

    • Sole Proprietorship: A business owned and operated by a single individual, offering simplicity and complete control.

    • Partnership: A business owned by two or more individuals who share profits and responsibilities.

    • Corporation: A legal entity that is separate from its owners, providing limited liability protection and the ability to raise capital through stock issuance.

  • Financing Activities.- How do companies acquire money for their operations to run?

    • Debt Financing- involves borrowing money from sources such as a bank by signing a note payable or directly by investors or by issuing bonds payable

    • Equity Financing- involves selling shares of stock to investors in exchange for ownership stakes in the company, allowing businesses to raise capital without incurring debt.

  • Investing Activities- how do companies purchase long-term resources?

    • ex: land, buildings, and equipment

    • involves the acquisition and disposition of factories, office furniture, computer and data systems, delivery vehicles, and other items that will be used to carry out the company’s business plans

  • Operating activities- What are companies’ date-to-day activities in producing and selling a product or providing a service?

    • are critical for a business because if a company is unable to generate income from its operations it is very likely that the business will fail.

  • External Users of Accounting

    • The process of preparing these publicly available financial statements is referred to as financial accounting.

    • The process of generating and analyzing such data is referred to as managerial accounting.

  • Ethics and Accounting

    • ethics deals with the values, rules, and justifications that govern one’s way of life

    • The American Institute of Certified Public Accountants (AICPA) has a professional code of ethics to guide the conduct of the members of the CPAs

    • The Institute of Management Accountants has written standards of ethical conduct for accountants employed in the private sector.

    • General Accepted Accounting Principles (GAAP) are guides to action that can lead to change over time

    • U.S Securities and Exchange Commission (SEC) primary focus is to regulate the interstate sale of stocks and bonds

    • Public Company Accounting Oversight Board ( PCAOB) approves auditing standards, known as generally accepted auditing standards (GAAS)

    • International Accounting Standards Board (IASB) has taken the lead in formulating international accounting principles.

  • Financial Statements

    • 4 Basic Financial Statements: the balance sheet, the income statement, the statement of stockholder’s equity, statement of cash flows.

    • The Balance sheet is a listing of a firm’s assets, liabilities, and stockholder’s equity as of a given date, usually at the end of the accounting period.

    • The accounting equation states the sum of a business’s economic resources must equal the sum of any claims on those resources

    • Resources of a Company = Claims on Resources

    • Assets = Liability + Stockholders’ Equity

    • Assets: are the economic resources of a business that can be expressed in monetary terms. it represents a probable future economic benefit to a business.

      • examples: cash, inventory, supplies, land, building’s , equipment

    • Liabilities: are obligations or debts that a business must pay in cash or in goods or in services at some future time as a consequence of past transactions or past events.

      • examples: Notes Payable, Wages Payable, Accounts Payable

        - Notes Payable : business can borrow money and sign a promissory note agreeing to repay the borrowed money in 6 months. Business reports this as Notes payable

        - Wages Payable : owes wages to employees for work already performed

        - Accounts Payable: if a business owes money to various suppliers for goods and services already provided

      • Stockholders’ Equity: refer to the ownership (stockholder claims) on the assets of a business.

        - Represent a residual claim ( it is a claim on assets of a business that remain after all liabilities to creditors have been satisfied.

      • AKA: Net Assets

    Assets- Liabilities = Stockholders’ equity = net assets

  • Income Statement