mcgraw summed

Definition and Purpose of Accounting

Accounting Defined: An information and measurement system that identifies, records, and communicates relevant, reliable, and comparable information about an organization’s business activities.
- Identification: Selecting transactions and events (e.g., entering sales invoice details, including prices and quantities, for the record-keeper).
- Recording: Chronologically documenting activities (e.g., preparing/entering a list of checks issued or using a cash register to enter sales).
- Communication: Preparing financial reports for users (e.g., preparing financial statements for creditors or interpreting information from financial reports).
- Record-Keeping (Bookkeeping): The specific task of recording transactions and events only, whether done manually or physically.

Accounting Information Users

External Users: These individuals do not directly run the organization and have limited access to accounting information. They rely on general-purpose financial statements.
- Examples: Customers, suppliers, and labor unions.
Internal Users: These individuals are directly involved in managing and operating the organization.
- Examples: Purchasing managers and marketing managers.
Field of Accounting:
- Managerial Accounting: Focuses on internal auditing, cost accounting, and general accounting opportunities for internal decision-makers.
- Private Accounting: This is where the majority of accounting opportunities are found.
Certifications: Professional designations include CPA, CMA (CGMA), CFP, CIA, CB, CPP, CFE, and CrFA.

Ethics and Financial Integrity

Fraud Triangle: Three factors that contribute to fraudulent activity:
- Opportunity: The workplace environment must provide a way for the fraud to occur.
- Pressure: The incentive or motivation to commit fraud (financial or personal).
- Rationalization: The justification an individual uses to make the illegal act seem acceptable.
Ethical Decision Making: The proper sequence of steps when choosing a course of action is:
1. Identify ethical concerns.
2. Analyze options.
3. Make an ethical decision.

Generally Accepted Accounting Principles (GAAP)

GAAP: The concepts and rules that govern financial accounting practice in the U.S. GAAP aims for information to have relevance and faithful representation.
Governing Bodies:
- FASB (Financial Accounting Standards Board): The organization primarily responsible for developing GAAP for use by all U.S. companies.
- IASB (International Accounting Standards Board): The organization responsible for issuing International Financial Reporting Standards (IFRS).
Conceptual Framework: Includes objectives, qualitative characteristics, elements, recognition, and measurement criteria.

Accounting Principles and Assumptions

Measurement (Cost) Principle: Accounting info is based on actual cost; cost is measured on a cash or equal-to-cash basis.
Revenue Recognition Principle: Provides guidance on when a company must recognize revenue; specifically, revenue is recognized when goods or services are provided to customers.
Expense Recognition (Matching) Principle: A company must record the expenses incurred to generate the revenue reported.
Full-Disclosure Principle: A company must report details behind financial statements that would impact user decisions (often found in footnotes to statements).
Going Concern Assumption: The presumption that the business will continue operating in the future.
Monetary Unit Assumption: Transactions and events are expressed in units of money.
Time Period Assumption: The life of a company can be divided into specific time periods (months, quarters, years).
Business Entity Assumption: A business is accounted for separately from other business entities and from its owner.

The Accounting Equation

The Basic Equation: $Assets = Liabilities + Equity$
- Assets: Resources a business owns or controls with expected future benefits.
- Liabilities: Total amount a business owes to creditors.
- Equity: The total amount of the business owned by stockholders.
Impact of Transactions:
- The equation must always remain in balance after every transaction.
- Total assets will always equal the sum of liabilities and equity.
- Equity Components: Equity is increased by Revenue and Common Stock; it is decreased by Expenses and Dividends.

Transaction Analysis Practice

Transaction Example 1: Tyler invests $2,000$ cash in exchange for common stock to start Tyler's Tayloring.
- Effect: Increase assets (cash) by $2,000$ and increase equity (common stock) by $2,000$ .
Transaction Example 2: Jean Consulting receives a utility bill for $500$ on January 31 but does not plan to pay it until February 15.
- Effect as of Jan 31: The business must record this event, increasing liabilities (accounts payable) and decreasing equity (utility expense).

Financial Statements and Sequence

Financial statements must be prepared in a specific order because the output of one serves as the input for another.

Income Statement:
- Purpose: Reports revenues and expenses over a period of time due to earnings activities.
- Equation: $Revenues - Expenses = Net Income$
- Heading: Company Name, Statement Name, Time Period (e.g., "For Month Ended Date").
Statement of Retained Earnings:
- Purpose: Explains changes in retained earnings from net income/loss and dividends over a period of time.
- Equation: $Beginning\,Retained\,Earnings + Net\,Income - Dividends = Ending\,Retained\,Earnings$
- Heading: Company Name, Statement Name, Time Period.
Balance Sheet:
- Purpose: Summarizes the financial condition of the company on a specific date; reflects the accounting equation.
- Equation: $Assets = Liabilities + Equity$
- Heading: Company Name, Statement Name, Specific Date (the last day of the period covered by the other statements).
- Structure: Assets are listed on the left side (ordered by liquidity: Cash, then Accounts Receivable, then Office Supplies, then Land); Liabilities and Equity are on the right side.
Statement of Cash Flows:
- Purpose: Summarizes cash inflows and outflows over a period of time.
- Sections:
  1. Operating Activities: Using resources to research, develop, produce, and market products.
  2. Investing Activities: Buying/selling long-term assets like land and equipment (useful for > 1 year).
  3. Financing Activities: Long-term borrowing/repayment to lenders and dividends to shareholders.
- Equation: $Beginning\,Cash + Net\,Cash\,Operating + Net\,Cash\,Investing + Net\,Cash\,Financing = Ending\,Cash$

Transaction Rules: Debits and Credits

Account Type	Increases With	Decreases With
Assets	Debit	Credit
Liabilities	Credit	Debit
Equity	Credit	Debit
Revenue	Credit	Debit
Expenses	Debit	Credit

Practice Calculations

Retained Earnings Calculation (Jacob's Chocolates):
- Beginning Retained Earnings: $4,000$
- Net Income: $10,000$
- Dividends: $300$
- Calculation: $4,000 + 10,000 - 300 = 13,700$
Retained Earnings Calculation (Sheldon Company):
- Beginning Retained Earnings: $1,000$
- Net Income: $5,000$
- Dividends: $250$
- Calculation: $1,000 + 5,000 - 250 = 5,750$

Performance Metrics: Return on Assets (ROA)

Definition: Measures a company's ability to provide financial rewards to investors by generating an adequate return on its investment in assets.
ROA Formula: $\text{Return on Assets} = \frac{Net\,Income}{Average\,Total\,Assets}$
Average Total Assets Formula: $\frac{Beginning\,Total\,Assets + Ending\,Total\,Assets}{2}$
Case Study (Rosalind Company):
- Revenues: $111,500$ ; Expenses: $92,545$
- Net Income: $18,955$
- Beginning Assets: $200,000$ ; Ending Assets: $246,000$
- Average Assets: $\frac{200,000 + 246,000}{2} = 223,000$
- ROA: $\frac{18,955}{223,000} \approx 8.5\%$
Trend Analysis: Moving from an ROA of $11.2\%$ last year to $12.6\%$ this year indicates improved performance.