Financial AccountingChapter 1- Accounting1) Identifies- the economic events relevant to its business2) Records- consists of a chronological diary of events3) Communicates- collected info to interested users by accounting reports-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managers who plan, organize, and run the businessincludes: marketing managers, production supervisors, finance directors-External Users Individuals and organizations outside a company who want financial information about the companyInvestors (owners)-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Financial information is capable of making a difference in a decision-Faithful representationthe numbers and descriptions match what really existed or happened, it is factual-Cost PrincipleDictates that companies record assets at their cost-Fair value principle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 ofits owner and all other economic entities-ProprietorshipBusiness owned by one personOwner receives any profits/ suffers losers/ Personally responsible-PartnershipA business owned by two or more persons associated as partners-Corporation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-The term used to describe the total amount paid in by stockholders for shares theypurchaseRetained earnings- Determined by three things:1) Revenues The gross increases in stockholders’ equity resulting from businessactivities 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 equity3) 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- Involve economic events between the company and come outside enterprise Internal transactions- 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’ EquityCommon Stock + Retained EarningsRevenues - 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 Summarizes information about the cash inflows (receipts and outflows (payments) for a specific period of time- 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