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OU ACCT 2113 - Chapter 1

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ACCT 2113 2st Edition Lecture 1 Outline of Current Lecture II. Accounting as a measurement/communication processA. Definition of Accounting- managerial and financialB. Investors and creditorsIII. 3 Business activities to measureA. Financial, Investing, OperatingB. How to measure the activitiesC. Defining assets, liabilities, stockholders’ equityD. Accounting EquationE. Defining revenues, expenses, net income, dividendsIV. Forms of Business OrganizationsA. Defining sole proprietorship, partnership, corporationV. Communicating through financial statementsA. Four Primary Financial StatementsVI. Financial Accounting Information and rulesA. DefinitionsB. Role of the AuditorVII. Objectives of Financial AccountingA. 3 objectivesB. Roles of the auditorVIII. Careers in AccountingA. Defining Public and privateIX. Conceptual FrameworkA. Defining decision usefulnessB. Qualitative characteristicsC. Assumptions that underlie the GAAPCurrent LectureAccounting as a measurement/communication processDefining 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 users1. Investors decide whether to invest in stock2. Creditors decide whether to lend money3. Customers decide whether to purchase projects4. Suppliers decide the ability to pay for supplies5. Managers decide production and expansion6. Employees decide employment opportunities7. Competitors decide market share and profitability8. Regulators decide on social welfare9. Tax authorities decide on taxation policies10. Local communities decide on environmental issues2 CategoriesManagerial 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 companyPEOPLE make decisions about COMPANIES whose activities are measure by ACCOUNTANTS who communicate information to PEOPLE3 Business activities to measure1. 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 thecompany.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 bookCorporation- an entity that is legally separate from its owners. Shares of ownership = common stockHow to measure business activitiesUltimately, 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 arethe 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)ORAssets – 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. ProfitabilityRevenue > expenses = net income (company distributes) dividendsRevenue < expenses = net lossForms 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 ownersPage 10- advantages vs. disadvantagesCommunicating through financial statementsThe 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 statement- a 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’ equity- is 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


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