Chapter 1 Into 1

Accounting is essential for:

• Recording and organizing financial information.

• Providing data for decision-making.

Key Distinction:

• Accounting: Backward-looking (prepares and reports past financial data).

• Finance: Forward-looking (uses accounting data for future decisions).

Importance of Financial Statements

Accountants prepare financial statements that must meet the following criteria:

• Timeliness: Data must be current to be useful.

• Accuracy: Data must be correct and precise.

• Comparability: Data should allow for easy comparison across time and entities.

• Usability: Information must be understandable and actionable.

Users of Financial Statements:

1. Internal Users (e.g., Managers):

   • Use data for budgeting, resource allocation, and decision-making.

2. External Users:

   • Investors/Shareholders: Evaluate profitability and growth.

   • Creditors/Lenders: Assess creditworthiness.

   • Regulators: Ensure compliance with tax laws and industry rules.

Ethical Accounting and Regulatory Framework

Ethics in accounting ensures transparency and trustworthiness. Key regulations include:

1. Generally Accepted Accounting Principles (GAAP):

   • U.S. standards that ensure consistent financial reporting across industries.

2. Sarbanes-Oxley Act (SOX):

   • Enacted after corporate scandals (e.g., Enron).

   • Focuses on preventing fraud and improving accountability.

   • Key Provisions:

     • Management certifies the accuracy of statements.

     • Stricter penalties for fraud.

     • Independence of auditors from company influence.

Three Types of Business Activities

All business actions fall under these categories:

1. Financing Activities:

   • Sourcing money to fund the business (outside of sales).

     • Debt Financing: Loans or bonds (liabilities like "Notes Payable").

     • Equity Financing: Selling ownership (e.g., common stock).

2. Investing Activities:

   • Spending money to grow or maintain the business.

     • Long-term assets like property, plants, and equipment (PPE).

3. Operating Activities:

   • Core activities of the business (direct inputs and outputs).

     • Revenues: Money earned from sales or services.

     • Expenses: Short-term costs like supplies, wages, and inventory.

Key Terms to Remember

• Assets: Resources owned by a business that have value.

• Liabilities: Obligations or debts owed to others.

• Equity: Ownership value in a business.

• Revenues: Money earned from core operations.

• Expenses: Costs incurred to generate revenue.