Financial Accounting Chap. 1

Financial Accounting

Measurement of business activities of a company and communication of those measurements to decision makers outside of the company (External)

Managerial Accounting- Focuses on information provided to managers only (Internal)

Creditors- Make decisions related to lending money to the company

Asset- Resources of a company

Liabilities- Amounts owed to creditors

Stockholders’ Equity- Represents the owners’ claim to resources

  • These claims arise from either contributions by the owner themselves, or net resources generated by the company operations

Financial Equation: Assets = Liabilities + Stockholders’ (Owners’) Equity

Revenues- Amounts recognized when the company sells products or provides services to customers

Expenses- The cost of providing products and services and other business activities during the current period

  • AKA- The cost incurred in order to generate revenue

Net Income- The difference between Revenue and Expenses

Dividends- Cash payments to stockholders

  • Not an expense


Types Of Business Organizations

Corporation- A company that is legally separate from its owners

  • Stockholders have limited liability

Sole Proprietorship- A business owned by one person

Partnership- A business owned by two or more persons


Statement of Cash Flows

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

  • Operating Cash Flows/Activities - Cash transactions involving revenue and expense activities (Positive and Negative—Outflow & Inflow)

  • Investing Cash Flows/Activities- Cash transactions for the purchase and sale of investments and long-term assets (Negative—Outflow)

  • Financing Cash Flows/Activities- Cash transactions with lenders and stockholders (Positive—Inflow)

    • Repaying interest isn’t a financing active, but paying back the principal is

Principle- Stuff that you borrow

Notes- Loans taken from banks


Financial Statements

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

  1. Income Statements (Statement of Operations, Statement Of Income, Profit and Loss Statement, P&L)

  • Reports the company’s revenues and expenses over an interval of time

    • Revenue - Expenses = Net Income

    • Heading, Revenues, Expenses, Net Income, Underlines

  1. Statement Of Stockholders’ Equity

  • Summarizes the changes in stockholder’s equity over an interval of time

    • Common Stock

      •  External source of equity, represents amounts invested by stockholders when they purchase shares of stock

      • Beginning Common Stock + New Issuances = Ending Common Stock

    • Retained Earnings

      • Internal source of equity, represents all net income- all dividends over the life of the company

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

    • Heading, Common Stock, Retained Earnings, Total Stockholders’ Equity

  1. Balance Sheet

  • Presents the financial position of the company on a particular date.

  1. Statement of Cash Flows

  • Measures activities involving cash receipts and cash payments over an interval of time

    • Operating, Investing, and Financing


The ending balance for the year, becomes the beginning balance for the next year.


Financial Accounting Standards

Generally Accepted Accounting Principles (GAAP)- The formal standards that have been established for the purpose of financial reporting

Securities and Exchange Commission (SEC)- Enacted in 1933 in the US after the stock market crash, restoring investor confidence in financial accounting. Sets forth the accounting and disclosure requirements for the issuance and sale of securities (stocks and bonds) to the public

Financial Accounting Standards Board (FASB)- An independent, private-sector body that has been given responsibility by the SEC for establishing accounting and reporting standards for public and private companies in the United States


Independent auditors- Extent to which financial statements are in compliance with GAAP

PCAOB- Ensure that auditors follow strict guidelines when conducting their audits