ACCT 2113 2st Edition Lecture 1 Outline of Current Lecture II Accounting as a measurement communication process A Definition of Accounting managerial and financial B Investors and creditors III 3 Business activities to measure A Financial Investing Operating B How to measure the activities C Defining assets liabilities stockholders equity D Accounting Equation E Defining revenues expenses net income dividends IV Forms of Business Organizations A Defining sole proprietorship partnership corporation V Communicating through financial statements A Four Primary Financial Statements VI Financial Accounting Information and rules A Definitions B Role of the Auditor VII Objectives of Financial Accounting A 3 objectives B Roles of the auditor VIII Careers in Accounting A Defining Public and private IX Conceptual Framework A Defining decision usefulness B Qualitative characteristics C Assumptions that underlie the GAAP Current Lecture Accounting as a measurement communication process Defining Accounting Accounting is the language of business and is a system of maintaining records of a company s operations and communicating that information to decision makers These 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 Earliest record keeping dates to Mesopotamia Investors and creditors lenders are the primary users 1 2 3 4 5 6 7 8 9 10 Investors decide whether to invest in stock Creditors decide whether to lend money Customers decide whether to purchase projects Suppliers decide the ability to pay for supplies Managers decide production and expansion Employees decide employment opportunities Competitors decide market share and profitability Regulators decide on social welfare Tax authorities decide on taxation policies Local communities decide on environmental issues 2 Categories Managerial accounting deals with the methods accountants use to provide information to an organization s internal users Financial accounting the two primary functions are to measure business activities of a company and to communicate those measurements to external parties for decision making Investors make decisions related to buying and selling the company s stock shares of ownership Creditors make decisions related to lending money to the company PEOPLE make decisions about COMPANIES whose activities are measure by ACCOUNTANTS who communicate information to PEOPLE 3 Business activities to measure 1 Financing activities transactions involving external sources of funding Sources are the owners of the company who invest their own funds in the business and creditors who lend money to the company 2 Investing activities the purchase and sale of long term resources or assets such as land buildings equipment and machinery and any resources not directly related to a company s normal operations Once the investments are in place the company has the resources to run and operate 3 Operating activities transactions that relate to the primary operations of the company such as providing products and services to customers and the associated cost of doing so like utilities taxes wages advertising rent and maintenance Examples on Page 6 in your book Corporation an entity that is legally separate from its owners Shares of ownership common stock How to measure business activities Ultimately investors and creditors want to know about the company s resources and their claims to them We measure resources owned by a company as assets Cash inventories supplies and buildings Amounts owed to creditors are liabilities Others are amounts owed to suppliers workers utility companies and government taxes Liabilities must be paid by a specific date For a corporation we refer to owner s claims to resources as stockholders equity since stockholders are the owners of the company Page 7 Accounting equation the way we express the relationship among the three measurement categories Assets Liabilities Stockholders equity resources creditor s claims owner s claims claims to resources OR Assets Liabilities Stockholders equity company owns Company owes difference The accounting equation illustrates a fundamental model of business valuation The value of a company to its owners equals total resources of the company minus the amounts owed to creditors Because stockholders claim all resources in excess of amounts owed to creditors profits of the company which add to total resources are claimed solely by stock holders the owners Revenues are the amounts earned from selling products or serves to customers Expenses are the costs of providing products and services We measure the difference between revenues and expenses as net income Net is used to describe profitability Dividends cash payments to stockholders usually every 3 months Profitability Revenue expenses net income company distributes dividends Revenue expenses net loss Forms of Business Organizations Sole Proprietorship is a business owned by one person Partnership business owned by two or more persons Corporation legally separate from its owners Page 10 advantages vs disadvantages Communicating through financial statements The primary means of communicating business activities is through financial statements which are periodic reports published by the company for the purpose of providing information to external users 4 primary financial statements Income Stockholders equity balance sheet and statement of cash flows 1 The income statementa financial statement that reports the company s resources and expenses over an interval of time Shows whether the company was able to generate enough revenue to cover the expenses of running the business If revenues are greater than expenses there is a net income If revenue is less than expenses there is a net loss Shows profitability over a period of time 2 Statement of Stockholders equityis a financial statement that summarizes the changes in stockholders equity over time Coincides with the time period of the income statement Consists of common stock and retained earnings Common stock amounts invested by stockholders when they purchase shares of stock external source of stockholders equity Retained earnings internal source represents the cumulative amount of net income earned over the life of the company that has not been distributed to stockholders as dividends 3 Balance sheetis a financial statement that presents the financial position of the company on a particular date