Chapter 1 Accounting The Accounting System Financial Accounting Reports periodic financial statements disclosures External Decision Makers stakeholders investors gov Managerial Accounting Reports detailed plans continuous performance reports Internal Decsion Makers run the company CEO manager Business Activities Financing borrowing paying back money to lenders and receiving additional funds from stockholder or paying them dividends Investing buying selling items such as plan and equipment used in production Operating income and paying suppliers Management accounting developing accounting information for internal decision making day today process of purchasing raw materials from suppliers manufacturing goods distributing collecting The 4 Basic Financial Statements Balance sheet reports the amount of assets liabilities stockholder s equity of accounting entity at a point in time snapshot as of December 31 2012 Income statement reports ability to sell goods for more than production and selling cost revenue expenses for a time period Statement of Stockholder s Equity reports payments to investors and amount of income reinvested for future growth changes in stockholder s equity Statement of cash flows reports ability to generate cash and how it was used Basic Accounting Equation Assets Liabilities Stockholder s Equity Assets economic resources cash inventory buildings Liabilities financing from creditors amounts owed to suppliers banks Stockholder s Equity financing from stockholders common stock retained earnings Entity Concept Assets Liabilities Stockholder s Equity Creditor lender of loans that charge interest Dividends cash payments earned to sell company at a higher price CEO CFO responsible for financial statements Audit examination of financial reports to ensure they represent what they claim conform with GAAP Consolidated includes parent US foreign countries Current assets assets that can be converted to cash within 1 year Current liabilities liabilities that must be paid within 1 year Net income goes to stockholders 1 Re invest in business retained earnings increase higher stock prices 2 Pay stockholders dividends taxed Profitable companies don t pay dividends General Accepted Accounting Principles GAAP measurement rules used to develop information in financial statements Securities Exchange Commission SEC given broad powers to determine measurement rules Financial Accounting Standards Board FASB recognized as the body to formulate GAAP International Accounting Standards Board IASB International Financial Reporting Standards IFRS Financial Accounting Reportsperiodic financial statements disclosuresExternal Decision Makersstakeholders investors gov Managerial Accounting Reportsdetailed plans continuous performance reportsInternal Decsion Makersrun the company CEO manager Assets listed in order of liquidity Current assets converted to cash within 1 yr Cash Short term investments Accounts receivable delivery of good service Inventory Other current assets Noncurrent assets converted to cash after 1 yrs Property plant and equipment Long term investments Other noncurrent assets Intangibles patents trademarks Total assets Balance Sheet Liabilities current liabilities due within 1 yr accounts payable owed to supplier accrued expenses expenses not yet paid for notes payable owed for borrowing taxes payable unearned revenue bonds payable noncurrent liabilities due after 1 yrs long term debt total liabilities Stockholder s Equity Common stock Additional paid in capital excess earnings Retained earnings Total stockholder s equity Income Statement Revenues Expenses Net income Revenues generated from sales of goods services Net sales Free revenue Rent revenue Interest revenue Expenses cost of goods selling general administrative expenses interest expense income before taxes Income tax expense Statement of Stockholder s Equity Beginning retained earnings net income dividends Ending retained earnings Contributed Capital Common Stock Additional paid in capital excess earnings Retained Earnings Dividends Statement of Cash Flow Operating cash flows Investing cash flows Financing cash flows Change in cash Cash at beginning of period Oh I F I had cash Cash at end of period cash on balance sheet Relationships among the statements 1 Net income Income statement increase in ending retained earnings Statement of SE 2 Ending retained earnings Statement of SE 1 of 2 components on Balance Sheet 3 Change in cash flows beginning cash balance Statement of SE End of year balance Balance Sheet Income Statement Statement of Stockholders Equity Revenues Expenses Net income 275 1 252 2 22 9 Beginning balance Net income Dividends Ending balance Common Stock 55 7 55 7 Retained Earnings 43 1 22 9 2 0 64 0 Statement of Cash Flows Operating cash flows Investing cash flows Financing cash flows Change in cash Cash at beginning of period Cash at end of period 10 6 Cash 87 5 125 5 47 0 9 0 1 6 Assets Balance Sheet Other assets Total assets Liabilities Stockholders Equity Common Stock Retained earnings Total Liabilities SE 10 6 516 8 527 4 407 7 55 7 64 0 527 4
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