What is needed to start a business?
1.money (capital) 2.need something people want (Demand) 3.need a good plan
what are some potential sources of capital (money)
1.venture capitalists 2.angel investors 3.IPOs (initial public offering)
Why do lenders lend money?How do they benefit?How big is their potential earnings from a loan?
1. Investors lend money to earn interest on a loan2. Their potential earnings are positive3. The downside for a bank is default, bankruptcy
Why do investors purchase stock? How do they make money on their investment? How big is the potential payoff for equity finances?
1. Investors purchase stock to make profit through dividends2. A company decides to give money back to its owners (dividends) or they can sell their stock3. If stock goes up they can earn money on the difference
Which one is riskier from the perspective of the capital provider (lender/investor) and why?
It is riskier for the lender, investor to buy shares. If you lend money they have to pay you back. If they go bankrupt, you have first claim to their resources. If you buy a share you are hoping price goes up, if doesn't they owe you nothing.
Which one is riskier from the perspective of the company and why
It is riskier for a company to do it with banks because they have to pay them back. You could potentially lose your business. Riskier to issue a loan as a company. Issuing shares of a company is sacrificing value, but less risky.
How do creditors and investors decide where to lend and invest their money
Through financial reports (how the company did every year). Also depending how the economy is doing. They can check if they are any country entaglements present.
Who creates the information that these decision makers require
The company is responsible for creating their own financial statements. The reason they make these financial statements is to look good/show off
How can decision makers know for sure that the information can be trusted?
1.accurate record keeping2. have auditors come in and check everything
What is an audit, who pays for it
An audit is the examination of the financial report of an organization. Third party looks at it, gives private information, tells truth, says if it is incorrect or correct, the company pays for it
What unwanted incentives might this payment structure create (company pays for the audit)
If the company doesn't like what the auditor says how they are doing, they can fire them
Who makes sure auditors do their job correctly? What enforcement mechanism is there for mangers who misreport?
There are group organizations in place to make sure auditors are doing their jobs correctly, if auditors misreport then jail time occurs.
What makes determining a company's performance, assets, liabilities, and equity so difficult?
Its difficult to determine a companies performance because the money is always moving. Complexity makes this a judgment call.
Why might it be important for multiple companies to follow the same rules and procedures when preparing information for decision makers?
Consistency purposes, for the investors to compare and understand
Why is it difficult to make rules that can be uniformly applied to all companies
They all operate differently, financial statements should represent the companies operations.
Definition of financial accounting
reporting information to external stakeholders, creditors, decision makers (investors, suppliers). Common rules/guidelines
Definition of managerial accounting
accounting for the company itself. Internal decision makers (managers, insiders). No rules/guidelines..just use the best method
Financial statements show the financial....and financial....of the company
performance, position
Four primary financial statements
1. balance sheet 2. income statement3. statement of stockholders equity 4.statement of cash flows
balance sheet
financial position, as of this date, this is what we have, only statement that doesn't close at end of year, snapshot of the company at a point in time.
income statement
financial performance, companies earned for the period, revenues and expenses
statement of stockholders equity
shows payments to investors and the amount of income the company reinvested for future growth
statement of cash flows
explains changes in cash during the period. Operating activities, investing, finacial
Balance sheet equation
Assets=Liabilities+Stockholders equity
If an asset increases, one of three things happened
1.liabilities increased 2.owners equity increased 3.a different asset decreased
Statement of Retained Earnings equation
Beginning retained earnings+net income-dividends=Ending retained earnings
Statement of Cash flows operating
Directly related to earnings process, day to day, primary operations
Statement of Cash flows Investing
Cash related to the acquisition/ sale of fixed long term assets ex.building, equipment, long term investments
Statement of Cash flows Financing
Cash exchanged with investors and creditors ex. dividends, repayments of loan principle,issuance of check
GAAP (US)
Generally Accepted Accounting Principles, USA GAAP or GAAP are the generally accepted accounting principles, provided by the government.
IFRS / IASB
A set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements. IFRS are issued by the International Accounting Standards Board.
SEC
Securities Exchange Commission, provide all the rules to regulate trading, and anything financial. They determine the GAAP-generally accepted accounting principles
FASB
financial accounting standards board, provide a structure of developing accounting standards
PCAOB
A non-profit organization that regulates auditors of publicly traded companies.
When you hear "Acquire" what should you think
Received
What does signing a contract qualify as
no economic impact until service or good is received
When you hear "Order" what should you think
cash isn't paid yet, good isn't received either
common stock and additional paid in capital
common stock is the number of shares * values you pay for it, then additional paid in capital is the difference of value per share-how much we pay
When you hear "Unearned" what should we think
liability !
How do we calculate net income
Revenues-Expenses
What is a transaction
An event that has economic impact (some exchange of value) and can be measured, either internal or external to the company
Events that are considered not a transaction
An agreement with a new supplier to begin purchasing from them next year, although signed there is no exchange of value with either the internal or external company
Two qualitative characteristics of useful information, what do they mean
1.relevant informationcapable of influencing decisions by allowing users to asses past activities and or predict future activitiesshould be information in amount depending on the nature of the item and company2. faithful representationinformation must be complete, neutral and free from errorcomapribility, vefirability
Separate entity assumption
Financial accounting recognition and measurement concept. States that each businesses activities must be accounted for separately from the activities of its owners, all other persons. Ex. When an owner purchases property for personal use, it is not an asset of the company
Continuity (going-concern) assumption
Financial accounting recognition and measurement concept. Unless there is evidence to the contrary, we ASSUME that the business will continue operating into the future, long enough to meet its contract commitments and plans
Stable monetary unit assumption
Financial accounting recognition and measurement concept. Each business entity accounts for and reports its financial results primarily in terms of the national monetary unit (Dollars)
Mixed attribute measurement model
some things are measured based on their current value and some based on their historical value (what we paid for them)
Current ratio formula (definition, what would make this ratio increase/decrease)*
Current Ratio=Current Assets/ Current liabilities. Once calculated current assets number should be larger than current liabilities number in order for it to be sufficient to pay for its current liabilities
Revenues
Amounts expected to be received for goods or services that have been delivered to a customer, whether or not the customer has paid for the goods or services
Expenses
Decreases in assets or increases in liabilities from ongoing operations. EX. rent expense or cost of goods sold
Gains
increases in assets or settlement of liabilities from peripheral transaction
Losses
decreases in assets or increase in liabilities from peripheral transaction (loss on sale of equipment)
peripheral transaction
a transaction that isn't related to regular operations in the business
Accrual accounting
Assets, Liabilities, Revenues, and expenses should be recognized when the transaction that causes them occurs, not necessarily when cash is received or paid
How to calculate net profit margin
Net income/ net sales or operating revenues
What does net profit margin tell us?
measures how much of every sales dollar generated during the period is profit, a rising net profit margin signals more efficient management or sales and expenses
What is an unadjusted trial balance?
Transactions result from Events (event occurs, results in a journal entry) example: bill received from supplier, bill sent to customer, any exchange of cash, stock is issued, equipment is received.
What is an adjusting entry?
an entry that shows a passage of time. They occur at the end of every period. Example:A company prepaid its insurance for five years, six months have now passed and some of that prepaid insurance should be converted to insurance expense. Adjusting entries also ensure that assets/liabilities are reported at correct amounts at year end
Deferred (Unearned) Revenues
Cash is received but revenue can't be recognized. We haven't done our job. Ex. Unearned rent revenue
Accrued Revenues
Revenue is accrued (Recognized) but cash hasn't been received Ex. Interest receivable, The customers haven't fulfilled their end
Deferred (Prepaid) Expenses
Cash has been paid, but no expense can be recognized. EX. Prepaid Rent, Prepaid Insurance
Accrued Expenses
Expense is accrued but cash hasn't been paid yet. EX. wages payable, Interest payable
Other adjusting entries
supplies, accumulated depreciation
process of adjusting entry
1. innception 2.adjusting entry 3.conclusion
inception
account for the transaction
adjusting entry
compute the amount of revenue earned or expense incurred for the period.
conclusion
amount for the transaction, opposite of inception, closing out revenues and expenses, and retained earnings to zero
End of year process
1. end of the year complete adjusting journal entries 2.put adjusting entries into t accounts, and calculate ending balance of each t account 3.put all ending balances into trial balances -make sure everything balances 4.create financial statements, input all numbers 5.close out revenues and expenses and retained earnings=0 by putting them in opposite credits and debits
When you use accumulated depreciation
also add in a contra set- going against an asset
Trial balance account orders
current,concurrent assets,short term liabilities, long term liabilities,stockholders equity, revenues, expenses
contributed capital-retained earnings
stockholders equity
How to total asset turnover ratio
Beginning balance + ending balance of Total Assets/2 then do net sales (or operating revenues)/average total assets
What does the total asset turnover ratio measure? What does it tell about a company, and what would make this ration increase or decrease
measures the sales generated per dollar of assets.
When you hear "on credit" or "on account" what should you think of?
Accounts payable
How do we calculate retained earnings?
Net Income-Dividends
What does operating income represent?
Before income tax
What does net income represent?
After tax
How to calculate par value?
Par value * number of stocks issued then entries affected would be cash,common stock and additional paid in capital
Stockholders equity consists of two things:
Retained earnings, and common stock
When we hear "on credit" we should think
we have an accounts receivable
How long are expenses for?
Just one year
When we loan something with interest we get what?
Earning revenue monthly
When is each accounting period?
December 31st
External Decision makers role and who are they
Evaluate the company, creditors and investors
Internal Decision makers, what is their role, and who are they?
Mangers, and they run the company
What is the balance sheet and what does it show?
Reports the economic resources it owns and sources of financing for those resources
What is the income statement and what does it show?
Reports the revenues less expenses for the accounting period which gives you the net income
What is the statement of stockholders equity and what does it show?
It reports additional contributions or payments to investors and the amount of income the company reinvested for the future
What is the statement of cash flows?
Reports its ability to generate cash and how it was used, provides information about an important company resource (money)
Who uses financial accounting?
...
Basic accounting equation
Assets=Liabilities + Stockholders Equity
Assets
Resources belonging to a company to have future benefit to the company
Liabilities
are debts or claims to a company's resources that result from past transactions and will be settled with assets or services
Stockholders Equity
compromises of the owners of the company (shareholders)
Basis equation for an income statement
Revenue-Expenses=Net Income
Current Asset example
Accounts Receivable, Prepaid Expenses, Short term investments
Non current Asset example
Long term investments,plant,property,equipment
Debits and Credits Reminder for going up (increase)
Deal Girls Dividends (Draws)ExpensesAssetsLossesGainsIncomeRevenuesLiabilitiesStockholders' (Owner's) Equity
Debits and Credits reminder for decreasing (going down)
GainsIncomeRevenuesLiabilitiesStockholders' (Owner's) EquityDeal Girls Dividends (Draws)ExpensesAssetsLosses
Where do peripheral activities go on the income statement
gains and losses
Inception is happening before or during the year
throughout the year
Net income is also referred to as...
Profit
cash basis accounting
A major accounting method that recognizes revenues and expenses at the time physical cash is actually received or paid out. This contrasts to the other major accounting method, accrual accounting, which requires income to be recognized in a company's books at the time the revenue is earned (but not necessarily received) and records expenses when liabilities are incurred (but not necessarily paid for).
Four criteria for revenue recognition
...
matching principle
Principle that dictates that efforts (Expenses) be recorded with accomplishments (Revenues)
How do we go from transactions to journal entries to t accounts to an unadjusted trial balance to creating an income statement and balance sheet
...
Accounts that are affected and not affected in the adjusting entries.
...
Closing entries affect
revenues and expense accounts and net income (retained earnings)
Creditors
Loans you money they need to make sure they can pay us back
Investors in common stock
wish to increase profits, use accounting information to determine whether the company net income will result in stock price increase
Chief Financial Officer
They want to make sure the company is as great as possible, he decides all financial decisions
Managers
the group of users of accounting information charged with achieving the goals of the business
The statement of cash flows would disclose the payment of dividends in what section of the cash flows statement
Financing activities
Buying and selling products are examples of
operating activities
Earning per shares
Net income/ Number of shares
The company policy toward dividends and growth could best be determined by examining the
retained earnings statement
An annual report
includes management discussion and analysis section, notes to the financial statements, and an auditors report
A trial balance is a listing of
general ledger accounts and balances
When we hear "on hand" think
in our possession
Four primary financial statements order
1.the income statement2.statement of retained earnings 3.balance sheet4.statement of cash flows.