Chapter 1 Understanding the Business I The accounting system a Financial accounting reports i External 1 Stockholders 2 Investors b Managerial accounting reports Internal decision makers 1 Run the company i II Business Activities a Financing activities i Borrow money from bank b Investing activities i Purchase equipment c Operating Activities i Sell merchandise to customers III The four basic financial statements a Balance sheet i Report of assets 1 Cash short term investment accounts receivable notes receivable inventory to be sold supplies prepaid expenses long term investments equipment buildings land ii Liabilities 1 Accounts payable accrued expenses notes payable taxes payable unearned revenue bonds payable iii Stockholder s equity 1 Common stock retained earnings iv The accounting equation 1 Assets Liabilities Stockholder s Equity 2 Sources of financings for economic resources a Liabilities from creditors b Stockholders equity from stockholders i Reports the revenues less the expenses of the accounting b Income statement period ii Revenues 1 Sales revenue 2 Fee revenue 3 4 Rent revenue Interest revenue iii Expenses 1 Cost of goods sold wages expense rent expense interest expense depreciation expense advertising expense insurance expense repair expense income tax expense c Statement of stockholder s equity i Reports the changes in each of the company s stockholder s equity accounts 1 Common stock 2 Retained earnings a Beginning retained earnings net income dividends ending retained earnings ii Change in the retained earnings balance cause by net income and dividends during the reporting period d Statement of cash flows i Reports inflows and outflows of cash during the accounting period in the categories of 1 Operating 2 Investing 3 Financing e EVERYTIME THERE IS A TRANSACTION HOW DOES IT AFFECT THESE FOUR THINGS i Must understand these relationships to understand finance IV Relationships among the statements Income statement is added in the statement of stockholders equity a b The retained earnings from the statement of stockholders equity is in the balance sheet under total assets c The cash at the end of the period is added into the balance sheet V Notes a Did you notice a sentences at the bottom of each financial statement i The notes are an integral part of these financial statements b All financial statements should be accompanied by notes which VI Financial Statement Summary page 17 provide a MEMORIZE VII Responsibilities for the accounting communication process a The rules General Accepted Accounting Principles GAAP i The SEC has worked closely with the accounting profession to b Public companies i Securities Act of 1933 ii Securities and Exchange Act of 1934 VIII Ethical Conduct a 3 step process Identify the benefits of a decision and who will be harmed Identify alternative courses of action i ii iii Choose the one you would like your family and friends to see IX Ensuring the Accuracy of Financial Statements reported on your local news a To ensure accuracy of the company s financial information management i Maintains a system of controls ii Hires external independent auditors iii Forms a committee of the board of directors to review these X External Auditors other two safeguards a Audit is an examination of the financial reports to ensure that they represent what they claim and conform with GAAP XI Supplement A Types of Business Entities a Sole proprietorship i Owned by a single individual b Partnership c Corporation i Owned by two or more i Ownership represented by shares of stock d Advantages of corporation i Limited liability ii Continuity of life iii Ease of transfer of ownership iv Opportunity to raise large amounts of money e Disadvantages of a corporation i Double taxation XII Supplement B Employment in the accounting profession today a Career opportunities i Public account ii Employment by organizations iii Employment in the public and not for profit sector
View Full Document
Unlocking...