BUS ADM 101 Lecture 1 Introduction to Financial AccountingOutline of Current Lecture II. Accounting ProcessA. Definition of AccountingIII. Business Activities (3)IV. Forms of Business OrganizationV. Four reports required by GAAPVI. Users and Uses of financial informationCurrent LectureAccounting ProcessAccounting: is a process used to record economic activities of an organization in order to generate reports for use by decision makers.The Process:- Create a system, to accomplish a specific task- Use a Method, to get uniform results- The Goal, is to assemble, aggregate, organize, and analyze huge volumes of data- Objective, Many RulesU.S. Rules are created by the Financial Accounting Standards Board or FASB.- These rules are called GAAP or Generally Accepted Accounting PrinciplesKeep in mind: Companies whose stock is publically traded also must follow laws enforced by a U.S. agency named Securities and Exchange Commission (SEC). Note: International Financial Reporting Standards (IFRS) and GAAP are close but not exactly the same.Business Activities 3 types1. Financing ActivitiesThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Borrowing Creates Liabilities (Debts) owed to Creditors. These are called notes or Bonds Payable.(Another liability created in operating business is Accounts Payable)Issuing or selling stock creates Stockholders Equity (Dividends are distributions of profit to owners on stock)2. Investing ActivitiesObtaining resources or assets needed to run a business (Buildings, Equipment, etc.)Note: There are other types of assets needed in operating the business, ie: Cash, Inventory, Supplies not used up etc.3. Operating ActivitiesThe Day to Day of running the Business- Revenues are the increase in assets resulting from the sale of a product or service.- Expenses are the cost of assets consumed or service used in generating revenue. (Advertising, cost of goods, inventory sold, paying employees, etc.) - Other: Collect Cash on accounts receivable, buy and sell inventory, buy expenses with cash or an accounts payable.Forms or Business OrganizationProprietorship- Owned/ Controlled by one person (Sole Proprietorship)- Easy to start- Considered a legal extension of owner- Owner personally liable for debts of the businessPartnership- Owned by two or more persons- Same legal liability to all partners as proprietorshipCorporation- Separate legal entity owned by stakeholders - Ownership divided in shares of stock - Stockholders risk limited to their investment in shares of stock- Income tax paid by companyFour Reports Required by GAAP (called the Financial Statements)- Income Statement- Balance Sheet- Retained Earnings Statement - Statement of Cash Flow(Detailed Foot notes required)SEC required audited 10K annual report and 10Q quarterly reports be made available to the public.Income statement (Profit or Loss)- Reports operating success or failure for a time period- Net Income (Profit) if revenues>Expenses- Net Loss if expenses>revenues - Prepare this statement firstRetained Earnings Statement- Shows what a company did with net profit earned in prior periods. (reinvest in the company or pay out to owners)- Also see stockholders equity on balance sheet- Prepare this statement secondBalance Sheet- Specific Data (one point in time)- Reports assets owned and leans against assets by: Creditors (Liabilities) and Owners (Stock Investment + Retained Earnings = Stockholders Equity)- Formula of Balance Sheet: Assets = Liabilities + Stockholders Equity also known as the Accounting Equation- An equivalent common view is Net WorthStatement of Cash Flow- Provides information where a company gets cash and spends cash- Summarizes for a time period like an Income Statement- 3 Groups: cash from Operating, Investing, and Financing activitiesUsers and Uses of Financial Information Internal Users-Management -Individuals (You and I)-Finance-MarketingExternal Users - IRS- Investors- Bankers- Creditors- SEC- CustomersInternal Users Need: Help to evaluate past decisions. Learn from success and failures. Make better decisions in the future. Analyze and evaluate current options. Assist in choosing best option. Discover new courses of action. Assurance that important options aren’t missed. Help to plan ahead. Set and achieve goals. Anticipate potential problems in the future. External Users Require: Accurate Unbiased data about success or failure of past operations. Provide reasonable basis for believing clams about the future. Disclosure of current financial condition. It it healthy or in distress? Defense of positions taken. Reports by law require a Critical Factor: users must have trust in information and need trust worthy help analyzing it.Good Vocab to know:Annual Report: A report prepared by corporate management that presents Financial Information including Financial Statements, a management discussion and analysis section, notes and an independent auditors report.Assets: Resources owned by a business.Auditors Report: A report prepared by an independent outside auditor saying that that auditors opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with generally accepted accounting principles.Balance Sheet: A Financial Statement that reports the assets and claims to their assets at a specific point in time.Certified Public Accountant (CPA) - An individual who has met a certain criteria and is thus allowed to perform audits of corporations.Common Stock- Term used to describe the total amount paid in by stockholders for the shares they purchase.Expenses- The cost of assets consumed or services used in the process of generating revenues.Income Statement: A Financial Statement that reports a company’s revenues and expenses resulting net income or net loss for a specific period of time.Liabilities: Amounts owed to creditors in the form of debts or other obligations.Notes to the Financial Statement: Notes clarify information presents in the financial statements and provide additional data.Retained Earnings Statement: A Financial Statement that summarizes the amounts and causes of changes in retained earnings for a specific period of time.Revenue: The increase in assets or decrease in liabilities resulting from