Chapter 1: Financial Accounting

Chapter 1: Financial Accounting Financial accounting  Accounting is a system of maintaining records of a company’s operations and communicating that information to decision makers (information provided for external users) People Terms/Vocabulary   Investors: decide whether to invest in stock  Customers: decided whether to purchase product  Managers: decide production and expansion  Competitors: decide market share and profitability  Tax Authorities: decide on taxation policies  Creditors: decide whether to lend money  Suppliers: decide the customer’s ability to pay for supplies  Employees: decide employment opportunities  Regulators: decide on social welfare  Local communities: decide on environmental issues  measurements to others Accountants: measure the activities of the company and communicate those Auditors – are hired by the company as an independent party to express an opinion of the extent to which financial papers are prepared in accordance with GAAP (add credibility to a company’s financial statements Vocabulary/Terms to Know:   Assets (A) – resources of the company, own or control (It’s a benefit)  (IDU)  Revenue (R) - amount recorded for goods/services sold  Dividends (D) – cash returned to the owners of the company (stockholders) Liabilities (L) - others/creditors’ claims on the assets or amounts owed to creditors  Stockholder’s equity (S.H.E) - owner’s claim on asset  Expenses (E) - costs of providing goods/services Net Loss – when expenses exceed revenues, the difference between them is negative Chapter 1: Financial Accounting Accounting Equation  Investors and creditors want to know about the company’s resources and their claims to those resources Assets = Liabilities + Stockholders’ Equity (resources) (claims to resources) Example: Purchase Car $40,000 Down payment: $4,000 Car 40000 = Bank 36,000 + Me 4,000 Owe: $36,000 Revenues, Expenses, and Dividends   All profits of the company are claimed solely by stockholders Profit is also referred to as Net Income Business Structures    Sole proprietorship: business is owned by one person Partnership: business is owned by two or more persons Corporation: business is legally separate from its owners (Limited liability of stockholders) Business Activities   Financing activities: transactions the company has with investors and creditors  provide benefit for several years Investing activities: transactions involving the purchase and sale of resources that Operating activities: transactions that relate to the primary operations of the company Communicating Through Financial Statements Primary financial statements:  Income statement: is a financial statement that reports the company’s revenues and expense over an interval of time  Revenue – Expenses = Net Income Statement of stockholders’ equity: shows the change in stockholders’ equity during the month. Beginning balances are zero when it is the first month of a company. The Chapter 1: Financial Accounting beginning balances next month will be the ending balances from the month before *Common Stock (CS) – external source, Retained Earnings (RE) – internal source* Beginning RE + Net Income – Dividends = End RE Beginning CS + Issued = End CS   S.H.E = End RE + End CS Balance sheet: reports assets, liabilities, and stockholders’ equity at a point in time Assets = Liabilities + Equity Statement of cash flows: a financial statement that measures activities involving cash receipts and cash payments over an interval of time. We classify all cash transactions into three categories that correspond to the three fundamental business activities: *Operating activities: operating cash flows include cash receipts and cash payments for transactions involving revenues and expenses (Day to Day) *Investing activities: investing cash flows generally include cash transactions for the purchase and sale of investments and productive long-term assets *Financing activities: financing cash flows include cash transactions with lenders, such as borrowing money and repaying debt, and with stockholders, such as issuing stock and paying dividends *****Cash goes in... Cash goes out***** *****Cash is your number one asset***** *Any transaction that affects the income statement ultimately affects the balance sheet through the balance of retained earnings* Making Decisions with Accounting   Financial accounting information is essential to making good business decisions No other company information better explains companies’ stock price performance than financial accounting net income Objectives of Financial Accounting Financial accounting should provide information that:    Is useful to investors and creditors in making decisions Helps to predict cash flows Tells about economic resources, claims to resources, and changes in resources and claims Chapter 1: Financial Accounting Career Options The Clients Career Opportunities Public Accounting Corporations Governments Nonprofit Organizations Individuals Auditors Tax preparers/planners Business consultants Financial planners Info technology developers Financial analysts Forensic accountants Info risk manager Investment bankers Environmental accountants Financial advisors Tax lawyers Private Accounting Employer of your choice Financial accountants Managerial accountants Internal auditors Tax preparers/Planners Payroll managers Info. Managers Management advisors Acquisition specialists FBI agents Sports agents Assumptions That Underlie GAAP  Economic entity assumption: states that we can identify all economic events with a  particular economic entity  need a unit or scale of measurement  indefinite) into artificial time periods for periodic financial reporting Monetary unit assumption: in order to measure financial statement elements, we Periodicity assumption: divides the economic life of an enterprise (presumed to be Going concern assumption: states that in the absence of information to the contrary, a business entity will continue to operate indefinitely