Chapter One What Is Accounting Accounting consists of three basic activities it identifies records and communicates the economic events of an organization to interested users Identifies economic events relevant to its business sale of snack chips by PepsiCo Records a systematic chronological diary of events measured in dollars and cents Communicates accounting reports financial statements analyze interpret for users By presenting recorded data in the aggregate the accounting process simplifies a multitude of transactions and makes a series of activities understandable and meaningful The major users and uses of accounting are as follows a Management uses accounting information in planning controlling and evaluating business operations b Investors owners decide whether to buy hold or sell their financial interests on the basis of accounting data c Creditors suppliers and bankers evaluate the risks of granting credit or lending money on the basis of accounting information Other groups that use accounting information are taxing authorities regulatory agencies customers labor unions and economic planners Bookkeeping usually involves only the recording of economic events There are two broad groups of users of financial information internal users and external users Internal users of accounting information are those individuals inside a company who plan organize and run the business o Marketing managers production supervisors finance directors company officers How do they get the information Managerial accounting provides internal reports External users are individuals and organizations outside a company who want financial to help users make decisions about their companies information about the company o Investors creditors o Financial accounting provides economic and financial information for investors creditors and other external users Taxing authorities regulatory agencies customers labor unions Ethics in Financial Reporting Concerns that the economy would suffer if investors lost confidence in corporate accounting because of unethical financial reporting Sarbanes Oxley Act of 2002 law passed to reduce unethical corporate behavior The standards of conduct by which one s actions are judged as right or wrong honest or dishonest fair or unfair are ethics Generally Accepted Accounting Principles GAAP indicate how to report economic events Securities and Exchange Commission SEC A governmental agency that requires companies to file financial reports in accordance with generally accounting principles Rules apply to public Public Company Accounting Oversight Board PCAOB It determines auditing standards and reviews auditing firms Financial Accounting Standards Board FASB A private organization that establishes generally accepted accounting principles Rules apply to public private International Accounting Standards Board IASB An accounting standard setting body that issues standards adopted by many countries outside of the U S Understand distinction between IASB U S Measurement Principles relate to relevance financial information is capable of making a difference in a decision and faithful representation numbers and descriptions match what really existed or happened factual Cost principle an accounting principle that states that companies should record assets at their cost o Cost what people pay to get something not the value of the bought product Objectively verifiable Problem only useful at the time it is on market Fair value principle an accounting principle that states that companies should record assets at their fair value Measured in dollars Assumptions Monetary unit assumption an assumption stating that companies include in the accounting records only transaction data that can be expressed in terms of money Economic entity assumption an assumption that requires that the activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities Adelphia case in which money was guaranteed to the founding family o Proprietorship a business owned by one person o Partnership a business owned by two or more persons associated as partners o Corporation a business organized as a separate legal entity under state corporation law having ownership divided into transferrable shares of stock The Basic Accounting Equation ASSETS owns LIABILITES owes STOCKHOLDERS EQUITY claims of owners The capacity to provide future services or benefits ex delivery truck computers money Accounts payable ex money for flour Note payable ex money borrowed from bank for truck Wages payable ex money to employees Goes to creditors Sales and real estate payable ex money to government Residual equity money left over after creditors claims are satisfied Common stock total amount paid in by stockholders for the shares they purchase Retained earnings section of the balance sheet determined by o Revenues gross increases in stockholders equity resulting from business activities entered into for the purpose of earning income v Problem effort o Expenses cost of assets consumed or services used in the process of earning revenue v o Dividends distribution of cash or other assets to stockholders Net income net loss revenue expenses Transactions are a business s economic events recorded by accountants and affect the accounting equation Investment by stockholders cash added to A and SE 1 2 Purchase of equipment for cash cash taken from A equipment added to A 3 Purchase of supplies on credit supplies added to A accounts payable added to L 4 Services provided for cash cash added to A revenue added to SE 5 Purchase of advertising on credit accounts payable added to L expenses taken from SE 6 Services rendered for cash and credit cash accounts receivable added to A revenue added to SE 7 Payment of expenses cash added to assets expenses taken from SE 8 Payment of accounts payable cash taken from A and L 9 Receipt of cash on account cash added to A accounts receivable taken from A 10 Dividends cash taken from A dividends taken from SE Rights are always assets Payables are always liabilities Financial Statements company for a specific period of time a Revenues are larger here 1 An income statement presents the revenues and expenses and resulting net income or net loss of a 2 A retained earning statement summarizes the changes in retained earnings for a specific period of 3 A balance sheet reports the assets liabilities and stockholders equity of a company at a specific time date a Not range point