ACG Chapter 1 Highlight Notes 09 09 2013 There are several types of external users of accounting information Investors owners use accounting info to make decisions to buy hold or sell stock Creditors such as suppliers and bankers use accounting info to evaluate the risks of selling on credit of lending money Taxing authorities such as the IRS want to know whether the company complies with the tax laws Customers are interested in whether a company will continue to honor product warranties and otherwise support its product lines Labor unions want to know whether the owners have the ability to pay increased wages and benefits Regulatory agencies such as the Securities and Exchange Commission or the Federal Trade Commission want to know whether the company is operating within prescribed rules A sound well functioning economy depends on accurate and dependable financial reporting Congress passed the Sarbanes Oxley Act SOX to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals As a result of SOX top management must now certify the accuracy In addition penalties for fraudulent financial activity are much more of financial information severe SOX increased the independence of the outside auditors who review the accuracy of corporate financial statements and increased the oversight role of boards of directors Effective financial reporting depends on sound ethical behavior Solving an Ethical Dilemma 1 Recognize an ethical situation and the ethical issues involved 2 Identify and analyze the principal elements in the situation Identify the stakeholders and ask the question What are the responsibilities and obligations of the parties involved 3 Identify the alternatives and weigh the impact of each alternative on various stakeholders Select the most ethical All businesses are involved in three types of activity alternative 1 Financing 2 3 Investing Operating The accounting information system keeps track of the results of each of the various business activities financing investing and operating The two primary sources of outside funds for corporations are borrowing money debt financing and issuing selling shares of stock in exchange for cash equity financing Persons or entities to whom a company owes money are its creditors Amounts owed to creditors in the form of debt and other obligations are called liabilities o Specific names are given to different types of liabilities depending on their source Note Payable is to a bank for the money borrowed to purchase something needed for the business Bonds Payable are debt securities sold to investors that must be repaid at a particular date some years in the future Corporations also obtain funds by selling shares of stock to investors Common stock is the term used to describe the total amount paid in by stockholders for the shares they purchase The claims of creditors differ from those of stockholders If you loan money to a company you are one of its creditors o In lending money you specify a payment schedule o You have the legal right to be paid at the agreed time In the event of nonpayment you may legally force the company to o In the case of financial difficulty creditor claims must be paid sell property to pay its debts before stockholders claims Stockholders have no claim to corporate cash until the claims of creditors are satisfied o Many corporations make payments to stockholders on a regular basis as long as there is sufficient cash to cover required payments to creditors These cash payments to stockholders are called dividends Once the company has raised cash through financing activities it uses that cash in investing activities Investing activities involve the purchase of the resources a company needs in order to operate Resources owned by a business are called assets Different types of assets are given different names For example mixing equipment is a type of asset referred to as property plant and equipment Cash is one of the more important assets owned by a business o If a company has excess cash that it does not need for a while it might chose to invest in securities stocks or bonds of other corporations Investments are another example of an investing activity Once a business has the assets it needs to get started it begins operations We call amounts earned on the sale of products revenues Revenue is the increase in assets or decrease in liabilities resulting from the sale of goods or the performance of services in the normal course of business Sources of revenue common to many businesses are sales revenue service revenue and interest revenue Supplies are assets used in day to day operations Goods available for future sales to customers are assets called inventory The right to receive money in the future is called an account receivable Example a customer buys a good and does not give cash immediately but the company has a right to expect payment from that customer in the near future Expenses are the cost of assets consumed or services used in the process of generating revenues Expenses take many forms and are identified by various names depending on the type of asset consumed or service produced o Cost of goods sold such as the cost of ingredients o Selling expenses such as the cost of salespersons salaries o Marketing expenses such as the cost of advertising o Administrative expenses such as the salaries of administrative staff telephone and heading costs incurred at the corporate office o Interest expense amounts of interest paid on various debts o Income taxes corporate taxes paid to the government Businesses may also have liabilities arising from these expenses For example if a business purchases goods on credit from suppliers the obligations to pay for these goods are called accounts payable to the bank There may be interest payable on the outstanding amounts owed Wages payable would be to the employees There are also sales taxes payable property taxes payable and income taxes payable to the government A business compares the revenues of a period with the expenses of that period to determine whether it earned a profit When revenues exceed expenses net income results When expenses exceed revenues a net loss results Assets liabilities expenses and revenues are of interest to users of accounting information This info is arranged in the format of four different financial statements which form the backbone of financial accounting 1 To show how successfully your business performed during a period
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