ACCT 209 1nd Edition Lecture 1 Outline of Last Lecture NoneOutline of Current Lecture I. What is accounting?II. What is a Business?A. ClassificationsB. FormsC. OrganizationIII. Generally accepted accounting principlesIV. Objectives and characteristics of accountingV. Recognition and measurement criteriaVI. Financial statementsVII. Other elements of 10-k (Annual reports)Current LectureINTRODUCTION TO ACCOUNTING AND BUSINESSWhat is accounting? Compare accounting and bookkeeping.Accounting is the process of analyzing, recording, and classifying business transactions and communicating that information to decision makers.Bookkeeping is a subset of accounting. It is the recording part of accounting.Accounting is needed forBusiness external decision-making: People outside day-to-day management; Such as owners, potential owners, lenders, and suppliers.Also known as Financial Accounting.Business internal decision-making: The Management; Much more detail oriented.Also known as Financial AccountingOther decision-making: Government and public policyThese 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.What is a business?An organization that uses resources to provide goods and services to earn a profit. Where Profit is the revenue earned less the cost to earn them.Businesses may be organized (classified) by • Function (types of business activity): Service business – So something (Provide a service) Example: Delta Airlines Merchandising business – Purchase goods for resale Example: Target, amazon, and Wal-Mart Manufacturing business – Make new goods Example: Ford and DellBusinesses can be all three; Like McDonalds.• Form (type of business organization): Proprietorship, Partnership, Corporation, Limited Liability CompanyOrganizational formLegal status Tax status CharacteristicsSole proprietorship1 ownerBusiness and owner are same entityNon-taxable (pass-through) entity Easy and inexpensive to organize70% of US businessesUnlimited liability of ownerLimited lifePartnership2 or more ownersBusiness and owners are same entityNon-taxable (pass-through) entityCombines skills and resources of morethan one personUnlimited liability of ownersLimited lifePossibledisagreement between partnersCorporation Business and owners are separateentitiesTaxable entityComplex, may be costly to organize20% of US businesses, generate 90% of US RevenuesCan obtain revenue resources by issuing stockDouble taxationMore paperworkMore regulationHave limited LiabilityLimited liabilitycompanyCombines elements of partnerships and corporations; provides limited liability to owners but usually taxed aspass-through entityOrganization/management of corporationOwners – Investors; Stockholders/shareholders; elect the board of directors Board of directors – Sets the policy and hires managementManagement – Implements the policy EmployeesGenerally accepted accounting principles (GAAP) –Guidelines that accountants follow in recording and reporting; Evolve over time. Created by FASB with input from practitioners/academics. SEC – Securities and exchange commission. Created in 1930’s by congress after stock market crash. Have authority over accounting and financial disclosures for companies whose shares of ownership (stock) are traded and sold to the publicFASB – Financial Accounting standards board. Primary responsibility for developing account principles. Created by SEC.IASB/IFRS – Internal accounting standards board/ international financial reporting standards. PCAOB – Public Company Accounting oversight board. Created with the Sarbane-Oxley Act. Primary objective of accounting information – Provide information useful for decision makingCharacteristics of accounting information-Relevant: Makes a differenceFaithful representation: accurate and\or estimated. Fairly represents what it’s meant to represent. Recognition (what)and measurement (how much) criteria:• accounting (or economic) entity concept – One specific business unit is the subject of the accounting system and financial statements. • cost principle – Record assets at cost paid to acquire them; generally reported at cost• going concern concept –Assume that business will continue indefinitely• monetary unit concept – Record transitions in monetary units ($)• time period concept – Need timely info, so report at regular intervals (Min. Annually)Financial statements – the end product of financial accounting (annual report or 10-K)• Income Statement (Statement of operation/earnings or profit and loss) Results of operations for specific period of time.• Statement of Retained earnings (or more comprehensive Statement of Shareholders’ Equity)Show changes in equity at period of time. Is a bridge between other two.• Balance Sheet (statement of financial position/condition) – Assets = liabilities + equity at specific point in time• Statement of Cash Flows – Changes in cash for period of timeOther elements of the 10-K• Notes to the statements- Details, descriptions, and disclosures• Auditor’s report – Public accounting firm; check the system• Management discussion and analysis (MD&A) – Put spin on it to sound