Financial Accounting Chapter 1 Accounting 1 2 Records consists of a chronological diary of events 3 Communicates collected info to interested users by accounting reports Identifies the economic events relevant to its business Explain what accounting is Account is an information system that identifies records and communicates the economic events of an organization to interested users Who Uses Accounting Data Internal Users External Users the company Investors owners managers who plan organize and run the business includes marketing managers production supervisors finance directors Individuals and organizations outside a company who want financial information about Use accounting information to make decisions to buy hold or sell ownership shares of a company Creditors such as suppliers and bankers Use accounting info to evaluate the risks of granting credit or lending money Identify the users and uses of accounting Major users uses Management uses Investors Creditors Financial accounting provides economic and financial information for investors creditors and other external users tax authorities regulatory agencies and labor unions Ethics The standards of conduct by which one s actions are judged as right or wrong People wont play the stock market if it is rigged Sarbanes Oxley Act SOX US law indented to reduce unethical corporate behavior Top management must now certify the accuracy of financial information Understand why ethic is fundamental business concept Ethic are the standard of conduct by which actions are judged as right or wrong Generally Accepted Accounting Principles Financial Accounting Standards Board FASB The primary accounting standard setting body in the US Securities and Exchange Commission SEC An agency of the US government that oversees US financial markets and accounting standard setting bodies SEC replies on FASB to develop accounting standards International Accounting Standards Board IASB International board that creates International Financial Reporting Standards Explain generally accepted accounting principles Common set of standards used by accountants Measuring Principles Relevance Faithful representation Financial information is capable of making a difference in a decision the numbers and descriptions match what really existed or happened it is factual Cost Principle Fair value principle Dictates that companies record assets at their cost States that assets and liabilities should be reported at fair value the pric received to sell an asset or settle a liability Assumptions Monetary unit assumption Requires that companies include in the accounting records only transaction data that can be expressed in money terms Vital to cost principle Example health of companies owner quality of service Companies cannot quantity this in money terms Economic Entity Assumption An economic entity can be any organization or unit in society Requires that the activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities Proprietorship Partnership Corporation Business owned by one person Owner receives any profits suffers losers Personally responsible A business owned by two or more persons associated as partners A business organized as a separate legal entity under state corporation law and having ownership divided into transferable shares of stock Stockholders may transfer all or part of ownership shares at any time Explain the monetary unit assumption and the economic entity assumption Monetary unit assumption requires that companies include in the accounting records only transaction data that can be expressed in terms of money Economic entity assumption requires that activities keep separate from owner The Basic Accounting Equation Assets Liabilities Stockholders Equity Asset The resources a business owns Assets have the capacity to provide future service or benefits Liabilities Claims of those to whom the company owes money to Accounts payable notes payable salaries and wages payable sales and real estate tax payable Stockholder s equity Claims of the owners Common stock purchase Retained earnings Determined by three things 1 Revenues The term used to describe the total amount paid in by stockholders for shares they The gross increases in stockholders equity resulting from business activities entered into for the purpose of earning income Selling merchandise performing service ect 2 Expenses The cost of assets consumed or services used in the process of earning revenue Decrease stockholder s equity 3 Dividends The distribution of cash or other assets to stockholders State the accounting equation and define it components Assets Liabilities Common Stock Revenues Expenses Dividends Transactions A business s economic events recorded by accountants External transactions Internal transactions Involve economic events between the company and come outside enterprise Economic events that occur entirely within one company Analyze the effects of business transactions on the accounting equation Each business transaction must have a dual effect on the accounting equation Expanded accounting equation Assets Liabilities Stockholders Equity Common Stock Retained Earnings Revenues Expenses Dividends Financial Statements Income statement Presents the revenues and expenses and resulting net income or net loss for a specific period of time Revenues Expenses Net Income Loss Retained earnings statement Summarizes the changes in retained earnings for a specific period of time Original retained earnings Net Income Loss Dividends End Retained Earnings Balance sheet Reports the assets liabilities and stockholders equity of a company at a specific time Gives Total Assets and Total Liabilities and Stockholder s Equity These should equal Statement of cash flows specific period of time Summarizes information about the cash inflows receipts and outflows payments for a Understand the four financial statements and how they are prepared Appendix 1A Public accounting An area of accounting in which the accountant offers expert service to the general public Auditing The examination of financial statements by a certified public account in order to express an opinion as to the fairness of presentation Taxation involving tax advice tax planning preparing tax returns and representing clients before governmental agencies Management consulting Ranges from development of accounting and computer systems to support services for marketing project and merger and