Chapter 1 Forms of Business Proprietorship Generally owned by one person Simple to establish Owner controlled Tax advantages Partnership Simple to establish Shared control Broader skills and resources Tax advantages Corporation Easier to transfer ownership Easier to raise funds No personal liability Business activities Financing Two primary sources of outside funds are 1 Borrowing money Amounts owed are called liabilities Party to whom amounts are owed are creditors Notes payable and bonds payable are different type of liabilities Issuing shares of stock for cash Payments to stockholders are called dividends 2 Investing Purchase of resources a company needs in order to operate Computers delivery trucks furniture buildings etc Resources owned by a business are called assets Operating Once a business has the assets it needs it can begin its operations Revenues Amounts earned from the sale of products sales revenue service revenue and interest revenue Inventory Goods available for sale to customers Accounts receivable Right to receive money from a customer in the future as the result of a sale Expenses cost of assets consumed or services used cost of goods sold selling marketing administrative interest and income taxes expense Liabilities arising from expenses include accounts payable interest payable wages payable sales taxes payable and income taxes payable Net income when revenues exceed expenses Net loss when expenses exceed revenues 4 Financial Statements Internal users Managers CFO CEO Employees External Users Investors Creditors Bankers Suppliers Government agencies IRS SEC Components of the Annual Report Financial Statements Management discussion analysis covers the companies ability to pay near term obligations its ability to fund operations and expansion and its results of operations Management must highlight favorable or unfavorable trends and identify significant events and uncertainties that affect these three factors Notes Clarify the financial statements Provide additional detail Auditors Report position Notes are essential to understanding a company s operating performance and financial Auditor s opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with generally accepted accounting standards Chapter 2 Classified Balance Sheet Presents a snapshot at a point in time To improve understanding companies group similar assets and similar liabilities together Intangible Assets assets that do not have physical substance goodwill film library customer lists cable tv franchises sports franchises brands trademarks Generally Accepted Accounting Principles GAAP A set of rules and practices having substantial authoritative support that the accounting profession recognizes as a general guide for financial reporting purposes Financial Accounting Standards Board FASB useful information should possess two fundamental qualities relevance makes a difference Predictive value confirmatory faithful representation what really happened Complete neutral and free from error Comparability results when different companies use the same accounting principles Information is verifiable if we are able to prove that it is free from error Information has the quality of understandability if it is presented in a clear and concise fashion Consistency means that a company uses the same accounting principles and methods from year to year For accounting information to be relevant it must be timely Assumptions in Financial Reporting Monetary Units o Requires that only those things that can be expressed in money are included in the accounting records Economic Equity Periodically Going Concern Accrual Basis Cost principle Full disclosure o States that every economic entity can be separately identified and accounted for o States that the life of a business can be divided into artificial time periods o The business will remain in operation for the foreseeable future o Transactions are recorded in the periods in which the events occur o Or historical cost principle dictates that companies record assets at their cost o Requires that companies disclose all circumstances and events that would make a difference to financial statement users Chapter 3 Transaction analysis is the same under IFRS and GAAP however different standards sometimes impact how transactions are recorded ASSETS LIABILITIES STOCKHOLDER S EQUITY Chapter 4 Adjusting entries followed statement Adjusting entries needed to ensure that the revenue recognition and expense recognition principles are Adjusting entries make it possible to report correct amounts on the balance sheet and on the income A company must make adjusting entries every time it prepares financial statements Types of Adjusted Entries Includes one income statement account and one balance sheet account o Deferrals consumed Prepaid expenses Expenses paid in cash and recorded as assets before they are used or Unearned revenues Cash received and reported as liabilities before revenue is earned Accruals Accrued revenues Revenues earned but not yet received in cash or recorded Accrued expenses Expenses incurred but not yet paid in cash or recorded Accrual vs Cash Transactions recorded in the periods in which the events occur Revenues are recognized when earned even if cash was not received Expenses are recognized when incurred even if cash was not paid Closing Rev and expense income sum Income sum retained earnings Dividends Retained Earnings Summary of accounting cycles Chapter 5 SALES COGS GROSS PROFIT OPERATION EXPENSE NET INCOME BEG INVENTORY PURCHASES GOODS AVAIL END INVENTORY COGS Freight costs incurred by the seller are an operating expense Multi step Income Statement Highlights the components of net income Three important line items o Gross profit o Income from operations o Net income Chapter 6 Manufacturing Raw Materials Work in Process Finished Goods Goods in Transit Purchased goods not yet received Sold goods not yet delivered Consigned Goods Goods held for sale by one party although ownership of the goods is retained by another party First in first out FIFO Last in first out LIFO Average cost Chapter 7 To record collection of note receivable by bank Cash Misc exp Note Receiveable Interest Rev Assume charged NSF fee Misc Exp To record NSF check A R Cash Cash Cash To record charge for printing company checks Misc Exp To correct error in recording check No 443 Cash A P Income Tax Income Tax Model Gross Income