ACCOUNTING is a system of information that measures business activities processes data into reports and communicates results to decision makers WHO USES ACCTG INFO 1 Individuals 2 Investors and Creditors 3 Regulatory Bodies 4 Nonprofit Organizations TWO KINDS OF ACCTG 1 Financial Acctg a Provides info outside the company such as investors creditors gov t agencies 2 Management Acctg a Provides info for management UNDERLYING CONCEPTS ASSUMPTIONS PRINCIPLES GAAP Generally Accepted Accounting Principles FASB Financial Accounting Standards Board formulates GAAP regs IASB International Accounting Standards Board Has NOT been adopted in the US yet Fundamental Qualitative Characteristics Relevance Faithful Representation Enhancing Qualitative Characteristics Comparability Verifiability Timeliness Understandability Constraints Explanations Cost Financial Reporting Standards Comparability Acctg info must be prepared in such a way that it can be compared with info from other companies in the same period and consistent with similar info provided in previous periods Verifiability The info much be capable of being checked for accuracy completeness and reliability Timeliness The info must be made available to users early enough to help them make decision Understandability The info must be sufficiently transparent so it makes sense to informed users THE ENTITY ASSUMPTION The business entity stands apart as a separate economic unit separate from owners stockholders THE CONTINUITY Going Concern ASSUMPTION We assume that the entity will continue to operate long enough to use existing assets land buildings equipment and supplies for its intended purposes THE HISTORICAL COST PRINCIPLE States that assets should be recorded at the actual cost as of the date of purchase THE STABLE MONETARY UNIT ASSUMPTION Assumes that the dollar s purchasing power is stable over time Ignores inflation APPLY ACCTG EQUATION Accounting Equation presents the resources of a company and the claims to those resources ASSETS LIABILITIES EQUITY Note Equity can be broken down into Common Stock Retained Earnings Assets Economic resources that are expected to produce a benefit in the future Liabilities Outsider claims debts payable to outsiders creditors Equity Ownership in entity also known as Capital Stockholders Equity Owners Equity EVALUATE BUSINESS OPERATIONS THRU FINANCIAL STATEMENTS Data Flow Income Statement Stmt of Retained Earnings Balance Sheet Stmt of Cash Flows Explanations Income Stmt Reports revenues expenses for the period also known as Stmt of Operations Bottom line is Net Income or Net Loss for the period Net Income Total Revenues Gains Total Expenses Losses Question Financial Statement Answer 1 How well did the company perform during the year Income Stmt or Stmt of Operations 2 Why did the company s retained earnings change during the year Stmt of Retained Earnings 3 What is the company s financial position at December 31 4 How much cash did the company generate and spend during the year Balance Sheet or Stmt of Financial Position Stmt of Cash Flows Revenues Expenses Net Income Net Loss Beg Retained Earnings Net Income or Net Loss Dividends End Retained Earnings Assets Liabilities Owners Equity Operating cash flows Investing cash flows Financial cash flows Increase or decrease in cash KNOW ORDER OF STATEMENTS 1 Income Statement or Statement of Operations Reports Revenues Gains Expenses Losses Bottom line of net income or loss for the period Company Name INCOME STATEMENT Year ending Dec 31 2014 Revenues Expenses Net Income 398 167 231 2 Statement of Retained Earnings Net income that has been reinvested into the business not paid as dividends Net income increase retained earnings Company Name STATEMENT OF RETAINED EARNINGS Year ending Dec 31 2014 Retained Earnings Dec 31 2013 Net Income Dividends Declared Retained Earnings Dec 31 2014 286 145 59 372 3 Balance Sheet or Statement of Financial Position Balance Sheet is essentially the accounting equation Reports Assets Current Assets expected to be converted to cash within next 12 months Cash short term investments accounts receivable notes receivable inventory prepaid expenses Long Term Assets expected to benefit the company for long period of time Property equipment accumulated depreciation long term investments intangibles Liabilities Equity Current Liabilities accounts payable income taxes payable accrued expenses current maturity of long term debt Long Term Liabilities long term notes payable bonds payable Stockholders equity common stock paid in capital retained earnings treasury stock Company Name BALANCE SHEET Dec 31 2014 Liabilities Current Liabilities Long Term Liabilities 21 000 17 600 Total Liabilities 79 000 Stockholders Equity 117 600 Common Stock 185 000 Retained Earnings 302 600 Total Stockholders Equity Total Liabilities Stockholders Equity 25 000 169 000 194 000 30 500 78 100 108 600 302 600 Assets Current Assets Cash Accounts Receivable Inventory Total Current Assets Equipment Total Assets 4 Statement of Cash Flows Reports 3 types of activities Operating cash flows from selling goods providing services Investing cash flows from purchase sale of long term assets Financing borrowing repayment of borrowed funds equity transactions issuing stock paying dividends Company Name STATEMENT OF CASH FLOWS Year ending Dec 31 2014 Net cash provided by operating activities Net cash used for investing activities Net cash provided by financing activities Net increase in cash Cash balance Dec 31 2013 Cash balance Dec 31 2014 90 000 100 000 40 000 30 000 5 000 35 000
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