Chapter 1 Notes Costs prices sales volume profis and return on investment are examples of accounting measurements Investors creditors managers and others who have a financial interest in an enterprise need a clear understanding of accounting terms and concepts if they are to understand and communicate about the enterprise Financial accounting Refers to information describing the financial resources obligations and activities of an economic entity resources Designed to assist investors and creditors in deciding where to place their scarce investment Financial position Describes an entity s financial resources and obligations at a point in time Results of operation Describes an entity s financial activities over a period of time Management managerial accounting Involves the development and interpretation of accounting information intended specifically to assist management in operating the business A management accounting information system is useful in providing a signal as to employee performance evaluating and rewarding decision making performance Characteristics of Management Accounting Information Needs to be timely Needs to be provided to those with decision making authority Accounting information measures the efficiency and effectiveness of resource usage Information that is produced to monitor and control processes needs to be provided to those who have decision making authority to correct problems Purpose is to motivate management to make future decisions that are in the best interest of the enterprise consistent with its goals objectives and mission The ultimate objective is to design and use an accounting system that helps management achieve the goals and objectives of the enterprise Tax accounting Primary users are taxing authorities Investors and creditors are examples of individuals with a financial interest in a company that benefit from an understanding of accounting measurements Accounting information is used by business organizations nonprofit organization and governmental agencies Investors Individuals and other enterprises that own the reporting enterprise Creditors Individuals and other enterprises whom the reporting entity owes money goods or services Investors and creditors are referred to as the primary external financial information users External users Individuals and other enterprises that have a current or potential financial interest in the reporting enterprise but that are not involved in the day to day operations of that enterprise External users of financial information include Owners creditors potential investors labor unions governmental agencies suppliers customers trade associations general public regulators taxing authorities Objectives of External financial reporting Provide information that is useful in making investment and credit decisions Provide information useful in assessing the amount timing and uncertainty of future cash flows Provide specific information about economic resources claims to resources and changes in resources and claims Characteristics of Externally Reported Information inexact and approximate measures usefulness enhanced via explanation Users of internal accounting information Board of directors CEO Chief Financial Officer Vice Presidents Business unit managers Plant managers store managers line supervisors Internal Financial reporting Planning Decision Making Performance Measurement Reliable sources of financial information for investors and creditors Press release directly from companies Daily publications Financial statement of companies Cash flow prospects The likelihood that an enterprise will be able to provide an investor with both a return on the investor s investment and the return of that investment Return of investment The repayment to an investor of the amount originally invested in another Return on investment The payment of an amount interest dividends for using another s Financial Statement A monetary declaration of information believed to be true and communicated in enterprise money monetary terms of the company The 3 primary financial statements are based on the same transactions but present different views Which of the following are correct statements about the three primary financial statements The income statement shows revenue and expenses for a period of time The statement of cash flows and the income statement is prepared for a period of time rather than a point in time 1 Balance Sheet Is a financial position statement that shows where the company stands in financial terms at a specific date A snapshot of the business in financial or dollar terms Also called Statement of Financial Position Every business prepares a balance sheet at the end of the year It consists of a listing of the assets the liabilities and the owners equity of the business The balance sheet of a business is prepared on the assumption that the business is a continuing enterprise or a going concern Features of Balance Sheet Statement of Financial Position Heading Name of the business Name of the financial statement The Date Body Assets Assets liabilities owner s equity If assets do not equal liabilities plus owners equity there must be a mistake in the financial statements An increase in one asset must be accompanied by a decrease in another asset economic resources that are owned by a business and are expected to benefit future operations Examples Cash notes receivable accounts receivable supplies land building office equipment Assets have and represent valuable legal claims or rights and definite physical characteristics A limitation of recording assets at historical cost is that the monetary unit or dollar is not always stable Liabilities Notes payable a written promise to repay the amount owed by a particular date and usually calls for the payment of interest as well Accounts payable The liabilities arising from companies purchasing merchandise supply or services Does not include a written promise Salaries payable Liabilities represent negative future cash flows for the enterprise Owner s equity Owner s equity capital stock retained earnings Decreases when purchases are made Dividends decreases owner s equity Owner s equity is increased by Earnings from profitable operations of the business Investments of cash or other assets by owners Capital Stock Represents the amount of money that owners originally invested in the company to become owners It consists of individual shares and each owner has a set number of shares Retained