Chapter 1 PDF

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Summary

How to work the problems for this chapter and also additional notes to help understand why and how....

Description

-Why is accounting important? Businesses, regulatory agencies, and the general public use accounting information.

Definitions Assets- are resources a company owns or controls. Examples: cash, supplies, equipment, land, and accounts receivable. Liabilities- creditor’s claims on assets. Equity- the owner’s claim on assets and is equal to assets minus liabilities Revenue- money coming in

-Identify (select transactions and events) -Recording (input, measure, and log) -Communicating (prepare, analyze, and interpret) -Examples: preparing and entering a list of checks issued= recording using a cash register to enter sales= recording Entering a list of the sales invoices, including the prices and quantities for the company’s recordkeeper= identifying Interpreting information from financial reports= communicating Preparing financial statements for creditors= communicating -Accounting vs recordkeeping Accounting: an information and measurement system that identifies, records, and communicates, relevant, reliable, and comparable information about an organization’s business activities Recordkeeping: the recording of transaction and events only, either manually or electronically -External information user: not directly involved in running the business (i.e lenders, shareholders, customers)

-Internal information user: directly involved in running/managing the business (i.e production managers, marketing managers

Financial accounting is for external users Managerial accounting is for internal users

-Ethics in accounting Accounting must be ethical so that the information is accurate and reliable The sequence of steps for making ethical decisions are: Identify ethical concerns, analyze options, and make ethical decisions -The Sarbanes-Oxley (SOX) Act requires documentation and verification of internal controls. -Financial accounting principals GAAP GAAP 4 principles: Measurement- “cost” principle, based on actual cost. Cash or equal to cash exchanged full disclosure- company provides details behind financial statements revenue recognition- guidance on when a company must recognize (record) revenue revenue is recognized when goods or services are provided at the amount expected to be received expense recognition- “matching” company records the expenses it occurred to provide revenue reported -SEC: govt agency oversees proper use of GAAP by public stock companies -FASB: develops the accounting principles that comprise GAAP -IASB- helps harmonize international financing -The organization that is responsible for issuing International Financial Reporting Standards (IFRS) is the: IASB

Assumptions: Going Concern- assumption that the business will continue to operate

Monetary unit- express transaction in money units Time period- the assumed amount of time the company uses for reports Business entity- 4 legal forms proprietorship, partnership, LLC, or corporation

Constraint: Cost-Benefit

-Three Major activities of organizations

Financing- payment for resources, planning resource acquisition or how this will happen Investing- the acquiring and disposing of resources, asset planning Operating- planning operational activities, strategic management

The accounting equation is (ASSETS=LIABILITIES+EQUITY) Liabilities are creditors’ claims on assets Equity is the owner’s claim on assets. -Assets are what a company owns or controls -Liabilities are what a company owes to non-owners

Expanded accounting equation Assets= Liabilities + Common Stock – Dividends + Revenues - Expenses Assets= Liabilities + (Contributed Capital +Retained Earnings) OR Assets= Liabilities + Common Stock (owner invested in company) – Dividends (paid out to stockholders) + Revenues (amount received from selling products/services) – Expenses (the cost to operate and have revenues)

Transaction Analysis

Transaction-an exchange of economic consideration between two parties External Transaction- exchange of value between two separate entities Internal Transaction- Exchanges within an entity Events- Happenings that affect the accounting equation

Assets must equal with liabilities and equity, everything that happens on one side must equal the other. Accounts payable=company owes someone Accounts Receivable= someone owes the company

The accounting equation has to stay in balance The 4 financial statements are: 1. Income statement a. Lists a company’s revenues and expenses with resulting net income or loss. Revenues-Expenses=net income or loss 2. Statement of retained earning a. Explains changes in equity from net income/loss and from dividends from that time period. b. Retained earnings are the company’s net income after paying out dividends Beginning retained earnings + net income (or loss) – Dividends = ending retained earnings 3. Balance sheet a. Summary of the financial condition of the company b. Assets = Liabilities + Equity 4. Statement of cash flows a. Equation beginning cash + net cash from operating activities + net cash from investing activities + net cash from financing activities = ending cash b. Summarize and reports the inflows and outflows of cash from a company over a period of time. c. Broken down into 3 section i. Cash flows from operating activities (from products and services money coming in and out) ii. Investing activities (buying/selling assets for long term use) iii. Financing activities (long term borrowing and paying. And dividends to shareholders)

iv. Net increase/loss in cash from the other 3 sections...