10 2 13 Chapter 17 Notes Accounting recording classifying summarizing and interpreting of financial events and transactions in an organization to provide management and other interested parties the financial information they need to make good decisions about its operation Financial transactions buying and selling goods and services acquiring insurance paying employees and using supplies Report to financial information to stakeholders employees owners creditors suppliers unions community activists investors and the government Divided into 5 key working areas 1 Managerial accounting o Provides information and analysis to managers inside the organization to assist them in decision making o Concerned with measuring and reporting costs of production marketing and other functions preparing budgets checking whether or not units are staying within their budgets and designing strategies to minimize taxes o Certified management accountant professional accountant who has met certain educational and experience requirements passed a qualifying exam and been certified by the Institute of Certified Management Accountants 2 Financial accounting organization o Financial information and analyses is for people primarily outside the o Annual report yearly statement of the financial condition progress and o Private accountant works for a single firm government agency or expectations of an organization nonprofit organization o Public accountant provides accounting services to individuals or businesses Certified public accountant passes a series of examinations established by the American Institute of Certified Public Accountants o The independent Financial Accounting Standards Board defines the generally accepted accounting principles that accountants must follow 3 Auditing financial statements o Reviewing and evaluating the information used to prepare a company s o Independent audit evaluation and unbiased opinion about the accuracy of a company s financial statements usually in an annual report o Certified Internal Auditor bachelor s degree two years experience in internal auditing and pass an exam administered by the Institute of Internal Auditors o Trained in tax law and is responsible for preparing tax returns or developing 4 Tax accounting tax strategies 5 Governmental and non for profit accounting o Supports organizations whose purpose is not generating a profit but serving ratepayers taxpayers and others according to a duly approved budget The Accounting Cycle 6 step procedure that results in the preparation and analysis of the major financial statements Relies on bookkeeper and accountant Bookkeeping the recording of business transaction o Divide all the firm s transactions into meaningful categories o Then record financial data from the original transaction documents into a record book or computer program called a journal o Double entry bookkeeping writing transactions in two places Requires two entries in the journal and in the ledgers o Ledger transfer information from accounting journals into specific categories so managers can find all the information about a single account Steps in accounting cycle 1 Analyze source documents sales slips travel records etc 2 Record transactions in journals 3 Transfer post journal entries to ledger 4 Take a trial balance 5 Prepare financial statements Income statement a Balance sheet b c Statements of cash flow 6 Analyze financial statements the figures are correct and balanced Trial balance summary of all the financial data in the account ledgers that ensures Understanding Key Financial Statements Accounting year is either a calendar year Jan 1 Dec 31 or fiscal year any date designated by business Financial statement summary of al the financial transactions that have occurred over a particular period o Balance sheet reports the firm s financial condition on a specific date What the company owns and owes on a certain date o Income statement summarizes revenues cost of goods and expenses for a specific period and highlights the total profit or loss the firm experienced during that period Revenue a firm earned selling its products compared to its selling costs over a specific period of time o Statement of cash flows provides a summary of money coming into and going out of the firm It tracks a company s cash receipts and cash payments Highlights the difference between cash coming in and cash going out of a business Fundamental Accounting Equation Assets Liabilities debts Owner s Equity Classifying Assets Assets economic resources owned by a firm Accountants list assets on the firm s balance sheet in order of their liquidity ease with which they can convert them into cash 1 Current assets items that can or will be converted into cash within one year includes cash accounts receivable and inventory 2 Fixed assets long term assets that are relatively permanent land buildings equipment 3 Intangible assets long term assets that have no physical form but do have value patents trademarks copyrights and goodwill Liabilities debts and Owners Equity Accounts Current liabilities debts due in one year or less Long term liabilities debts not due for one year or more 1 Accounts payable current liabilities or bills the company owes others for merchandise or services it purchases on credit but has not yet paid for 2 Notes payable short term or long term liabilities like loans from the banks that a business promises to repay by a certain date 3 Bonds payable long term liabilities money lent to the firm that it must pay back Retained earnings accumulated earnings from the firm s profitable operations that are reinvested in the business and not pain out to stockholders in distributions of company profits Income Statement Income statement the financial statement that shows as firm s bottom line profit after costs expenses and taxes The resources revenue left over or depleted are referred to as net income or net loss Revenue monetary value of what a firm received for goods sold services rendered and other payments Cost of Goods Sold Cost of Goods Sold cost of goods manufactured measures the cost of merchandise the firm sells or the cost of raw materials and supplies it used in producing items for resale Gross profit gross margin how much a firm earned by buying or making and selling merchandise In a service firm there is no cost of goods sold gross profit net sales Operating Expenses Depreciation systematic write off of the cost of a tangible asset over its estimated useful
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