3 Types of Bus Activity OIF Operating primary activities for which org is in business rev is the inc in assets resulting from a sale exp is the cost of assets consumed or services used in the process of generating rev Investing purchasing resources assets needed to operate land building equipment cash investing in other companies Financing starts expands business borrowing from creditors n p b p selling cs paying divs non cash event purchasing on account billing customers incurring expenses on account Chp 1 accounting is the information system that identi es records and communicates economic events to interested users Primary Forms of Business Sole Proprietorship easy to establish owner controlled tax advantages personally liable dif cult nancing transfer of ownership Partnership easy to establish shared control tax advantages broader skills resources personally liable transfer of ownership is dif cult Corporation easy transfer of ownership easy to raise funds capital lower legal liability unfavorable tax treatment Users Internal nance hr marketing management cash suf cient to pay divs can we afford to pay employees raise wages what price will max inc should any products be eliminated External investors creditors is income good how does this company compare to others will they be able to pay debts as they come due Notes descriptions of accounting policies explanations of uncertainties Auditors Report unquali ed opinion CPA MD A description of ability to fund operations expansion results of operations Chp 2 Classi ed Balance Sheet reveals a company s ability to pay its debts claims of short term and long term creditors A Current Assets expected to be converted to cash used in the business within a short period of time one yr whichever is LONGER ex cash short term investments receivables inventories supplies prepaid expenses listed in order of liquidity Long Term Investments not expected to be converted within a year not intended for use within the business investments in the stocks and bonds of OTHER corporations ex land you bought and are planning to use later on PPE long useful lives used in business ex land buildings machines delivery equipment furniture acc dep most are depreciated except land is NEVER depreciated Intangible Assets rights privileges competitive advantages non current no physical substance ex franchise patents copyrights goodwill some are amortized L Current Liabilities obligations that are supposed to be paid within the yr ex a p w p note p income tax p dividends payable Long Term Liabilities obligations expected to be paid after a yr ex bonds p lease liability employee pension plans mortgages SE CS investment of assets by stockholders in the company RE earnings retained for the use in the business GAAP generally accepted accounting principles the agreed upon accounting rules which most US companies use in preparing nancial statements SEC securities exchange commission overSEEs US nancial markets standard setting PCAOB determines auditing standard and reviews auditing rms FASB the primary standard setting body IASB issues standards IFRS that have been adopted by many countries liquidity the ability to pay short term obligations as they come due within the next year or operating cycle solvency the ability for a company to survive over a long period of time pay interest as it comes due and repay the balance of debt at its maturity working capital short term ability to pay obligations CA CL Reporting Concepts accounting info should be relevant if info has the ability to make a difference in a decision provides forecasts con rms corrects prior expectations timely reliable can be depended on veri able faithful representation neutral comparable diff companies use similar actg principles consistent company uses the same methods from yr to yr Assumptions monetary unit ass include in the actg records only things that can be expressed in terms of money economic entity ass every economic entity can be separately identi ed accounted for time period ass allows the life of the business to be divided into arti cial time periods months quarters semi annual annual periodicity going concern ass assumes business will be in existence for the foreseeable future allows use of capitalizing cost when recording assets Principle cost pr dictates that assets be recorded at their cost full disclosure pr requires all circumstances events that would make a difference to nancial statement users to be disclosed Constraints materiality an item is material if it can in uence the decision of an investor or a creditor don t have to follow GAAP for small amnts relates to n stmts items impact on a company s overall nancial condition operations items that are not signi cant enough to make a difference to decision makers and users can be ignored conservatism requires that companies write down inventory to market value if it is below cost when MV of inventory exceeds cost the inventory is not increased but instead it is kept at cost allows accountant to choose the method that will be least likely to overstate assets and income Chp 3 Dr xx Cr xx Recording Process 1 analyze each transaction 2 enter transaction into journal 3 transfer journal info into ledger accounts provides management with balances in various accounts a trial balance is a list of accounts their balances at the time used to prove mathematical quality of dr cr after posting may uncover errors in journalizing posting useful in preparation of nancial statements if the sum of the dr column equals the sum of the cr column this indicates the mathematical equality of the accounting equation pay rent dr rent exp cr cash bill someone dr a r cr service rev receive cash when service was provided dr cash cr service rev advertising expense on account dr ad exp cr a r Chp 4 Principle s in accordance with GAAP Revenue Recognition Pr dictates that revenue be recognized in the accounting period in which it is earned or when the service is performed Matching Pr expense recognition efforts exp must be matched with accomplishments rev matches expenses with revenues Accrual Basis transactions are recorded in periods in which the events occur revenue recognition matching occur under accrual basis GAAP Cash Basis revenue is recorded when cash is received and expenses are recorded when cash is paid misleading overstating understating Adjusting entries are needed to ensure revrec matching principles are followed may lack source documents invoices receipts
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