ACCOUNTING NOTES CHAPTER 1 FINANCIAL STATEMENS BUSINESS DECISIONS UNDERSTANDING THE BUSINESS o Owner Managers o Creditors founders otherwise known as managers of the business a company s lender i e when a bank loans a co money they are their creditors Creditors lend money to a company for a specific length time in hopes of regaining by charging interest on what money they lend o Investors o Manager working on behalf of the company not the owner o Dividends o Financing activities what the company earns in form of cash payments borrowing additional money or paying back money to its lenders and receiving additional funds or paying dividends to owners Buying or selling items such as plant equipment used in production of o Investing activities the good product The Accounting System Accounting a system that collects and processes financial information about an organization and reports that information to decision makers o Internal Decision Makers o External Decision makers Investors Creditors Co s managers Parties outside the firm Developing accounting information for internal decision makers called managerial or management accounting is the subject of a separate accounting course accounting for external decision makers Financial Accounting Structure Content of Statements 1 What categories of items are reported on each of the four 2 How are the elements within a statement related 3 Why is each element important to owner s or creditor s statements decisions THE FOUR BASIC FINANCIAL STATEMENTS Balance sheet Income statement Statement of retained earnings Statement of cash flows summarize the financial activities of a business Balance Sheet reports the amount of assets liabilities and stockholder s equity of an The Balance Sheet accounting entity at a point in time Structure 1 Name of the entity Co 2 Title of the statements Balance sheet 3 Specific date of the statement 4 Unit of measure i e in thousands of dollars Accounting entity the organization for which financial data are to be collected on balance sheet this entity if viewed as owning the resources it uses and as owning its debts Balance sheets lists the company s assets economic resources owned by the entity It then lists liabilities what the company is responsible for in debts and collection And finally stockholder s equity money brought in from owners The basic accounting equation o Financial Position the economic resources that the Assets Liabilities Stockholder s Equity company owns and the sources of financing for those resources Assets company Accounts receivable Co sells products on credit and receives promises to pay in cash later on the economic resources owned by the the company s debts or obligations Liabilities Accounts payable arise from the purchase of goods or services from suppliers on credit without a written contract Notes payable results from cash borrowings based on a formal written debt contract with lending institutions such as banks Stockholder s Equity indicates the amount of financing provided by owners of the business earnings Contributed capital investment of cash and other assets in the business by the owner Retained earnings the amount of earnings profit reinvested in the business The Income Statement Income Statement reports the accountant s primary measure of performance of a business revenues less expenses during the accounting period While the term profit is used widely for this measure of performance accountants prodder to use the technical terms net income or net earnings Reports a specific period of time Accounting period the time period covered by the financial statements one year in this case o Companies earn revenues from the sale of goods services to customers Revenues are normally reported for goods and services that have been sold to a customer whether or not they have yet been paid for o Expenses Receives a promise of future payment called an account receivable which is later collected in cash represent the dollar amount of resources the entity used to earn revenues during the period Expenses are reported in one accounting period may actually be paid for in another accounting period not equal the net cash generate by operations is the excess of total revenues over total expenses Net income normally does o Net Income Statement of Retained Earnings Statement of retained earnings reports the way that net income and the distribution of dividends affected the financial position of the company during the accounting period Covers a specified time period one year The declaration of dividends to the stockholders decreases retained earnings Beginning Retained Earnings Net Income Dividends Ending Retained Earnings The retained earnings statement indicates the relationship of the income statement to the balance sheet Statement of Cash Flows are cash o Cash Flows from Operating Activities Statement of cash flows reports inflows and outflows of cash during the accounting period in the categories of operating investing and financing flows that are directly related to earning income cash flows related to the acquisition or sale of the company s productive assets o Cash Flows from Financing Activities directly related to the financing of the enterprise itself o Cash Flows from Investing Activities include are Relationships Among the Statements 1 Net income form the income statement results in an increase in ending retained earnings on the statement of retained earnings 2 Ending retained earnings from the statement of retained earnings is one of the two components of stockholders equity on the balance sheet 3 The change in cash on the cash flow statement added to the beginning of the year balance in cash equals the end of the year balance in cash on the balance sheet Notes The notes are an integral part of these financial statements Notes provide supplemental information about the financial condition of a company without which the financial statements cannot be fully understood Three basic types of notes 1 Provides descriptions of the accounting rules applied in the company s 2 Presents additional detail about a line on the financial statement 3 Provides additional financial disclosures about items not listed on the statements statements themselves REPONSIBILITIES FOR THE ACCOUNTING COMMUNICATION PROCESS Measurement rules applied in computing the numbers on the statements Generally Accepted Accounting Principles GAAP the measurement rules used to developed the information in financial statements
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