Principles of Financial and Managerial Accounting Lesson 1

  • Accounting: Quanititative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.

    • Quantitative: Accounting relates to numbers because it can be easily summarized

    • Financial: Accounting focuses on the financial dimension of the health and performance of a business

    • Useful: The practice of accounting is grounded in a rich tradition of theoretical frameworks defined by U.S. accounting rules.

    • Decisions: Accounting is the structured reporting of the past, which is useful if it impacts decisions about the future.

  • One of the primary purposes of accounting is to accumulate, measure, and communicate financial information about businesses and other organizations

    • Much of this financial information is contained in a company’s financial statements

  • The Accounting Cycle details the steps that are involved in the production of the financial information that is contained in the financial statements. The following steps in regard to the transactions of a business include:

    • Analyzing

    • Recording

    • Classifying

    • Summarizing

    • Reporting

  • There are three basic functions of an accounting system

    • Analysis: Looking at business events to determine if information should be captured by the accounting system

    • Bookkeeping: The preservation of a systematic, quantitative record of an activity

    • Evaluation: Obtaining and using financial information to determine the health and performance of a business

  • A more summarized way of framing an accounting system:

    • Analysis of events

    • Routine Bookkeeping

    • Structuring data for Evaluation

  • Decision-making process used in accounting:

    • Step 1: Identify the issue

    • Step 2: Gather information

    • Step 3: Identify alternatives

    • Step 4: Select the option that will most likely result in the desired objective

  • Captial: The money used by a business to get the resources they need to make a profit

  • Captial comes from 3 sources:

    • Investors (owners)

    • Creditors (lenders)

    • The business itself in the form of earnings that have been retained

  • Revenue: The amount of assets created through the sale of goods and services

  • Managerial Accounting: The gathering and analysis of information for the purpose of internal decision making

    • The more detailed and private information that businesses use to make daily decisions

  • Financial Accounting: Gathering, reporting, and analysis of information primarily for the benefit of external users such as investors and creditors

    • Summary statements or reports for individuals or entities outside of the business

  • The properties of Managerial Accounting include:

    • Product cost

    • Breakeven analysis

    • Budgeting

    • Performance evaluation

    • Outsource production

  • The properties of Financial Accounting include:

    • Credit analysis

    • Production and utilization of financial statements

    • Regulatory uses (such as financial health of bank and insurance companies)

    • Estimated value of a company

  • Annual Report: A document that summarizes the results of operations and financial status of a company for the past year and outlines future plans.

  • Financial Statements: Reports that summarize the financial status and results of operations of a business entity. These reports include:

    • Balance Sheet (The most basic statement that lists assets and liabilities of a specific point in time)

    • Income Statement (Shows the profit over a period of time) (Net Income)

    • Statement of Cash Flows (Shows where the cash came from and went to over a period of time)

  • Owner’s Equity: The remaining claim against the assets of a business after the liabilities have been deducted

    • The difference between what is owned (assets) and what is owed (liabilities).

  • Net Income: An overall measure of the performance of a company that is equal to revenues minus expenses for the period.

  • Two key external users of financial information:

    • Lenders

    • Investors

  • Lenders (creditors) utilize financial accounting data to evaluate whether you would be able to repay a loan. They use the following types of information:

    • A listing of your assets and liabilities

    • Payroll stubs, tax returns, and other evidence of your income

    • Details about any monthly payments (car, rent, credit cards, etc.) you are obligated to make

    • Copies of recent bank statements to document the flow of cash into and out of your account

  • Investors utilize financial accounting data to help them estimate how much cash they can expect to receive in the future if they invest in a business now. They use the following types of information:

    • Financial statements

    • Business plans

    • Market forecasts

    • Management character