Accounting
- the language of business
- system of maintaining records of a company's operations & communicating that information to decision makers
Accountants measure...
- measure the activities of the company and communicate those measurements to others.
Investors & Creditors make decisions about...
- Companies
Companies activities are measure by....
- Accountants
Accountant communication information to....
- Investors & Creditors
Managerial Accounting
- accounting info provided to internal users
Financial Accounting
- accounting info provided to external users
Two Functions of Financial Accounting
1. measure business activities of a company
2. communicate those measurements to external parties (creditos/investors) for decisions-making purposes
Investors
- want to make good decisions related to buying & selling the company's stock (shares of ownership)
Value of Stock is directly tied to ...
- the company's ability to make a profit
Creditors
- make decisions related to lending money to the company
Corporation
- a company that is legally separate from its owners
- advantage of being legally separate is that the stockholders have limited liability
- suffer a form of double tax - 1st when the company earns it & pays corporate incomes taxes on it & 2nd when stockh
Limited Liability
- prevents stockholders from being held personally responsible for the financial obligations of the corporation
- stockholders can lose their investment but cannot lose their personal assets (home, cars, etc)
Sole Proprietorships
- business owned by one person
- disadvantages is that owners must have sufficient personal funds to finance the business in addition to the ability to borrow money
- disadvantage is that it does not offer limited liability - owners are held personally re
Partnership
- a business owned by two or more persons
- disadvantage is that it does not offer limited liability - partners are held personally responsible for the activities of the business
do not offer the advantage of lower taxes compared to corporations - taxed a
Financing Activities
- transactions the company has with investors & creditors, such as issuing stock & borrowing money from a local bank
Investing Activities
- transactions involving the purchase & sale of resources that are expected to benefit the company for several years, such as purchase of equipment
Operating Activities
- transactions that relate to the primary operations of the company, such as providing products & services to customers & the associated costs of doing so, like utilities, taxes, advertising, salaries, rent, & utilities
Assets
- resources of a company (supplies, inventory for sale, building, land, cash, equipment, etc)
- investors & creditors claim the resources of the company
Liabilities
- amounts owed to creditors (amounts owed to the bank, owed to suppliers, workers, utility companies, & government in the form of taxes)
- claims that must be paid by a specified date
Stockholders Equity
- owners' claims to resources - b/c stockholders are the owners
Accounting Equation
- relationship amount the 3 measurement categories (assets, liabilites, & stockholders' equity)
- shows that a company's resources equal creditorss and owners' claims to those resources
Basic Accounting Equation
Assets = Liabilities + Stockholders' Equity
- can move components around:
Assets - Liabilities = Stockholders' Equity
- illustrates a fundamental model of business valuation
The Value of a Company Equals...
- total resources of the company minus amounts owed to creditors
- Creditors expect to receive only resources equal to the amount owed them
- Stockholders can claim all resources in excess of the amount owed to creditors.
Profits of the Company are claimed solely by...
- stockholders
Revenues
- amounts earned from selling products or services to customers
Expenses
- the costs of providing products & services
- salaries, rent, supplies, utilities
Net Income
- measure the difference between revenues and expenses
- AKA earning & profit
Net Loss
- if expenses exceed revenues - the difference between them is a negative amount
Net
- used to describe a company's profitability
- often used to describe the difference between two amounts
Divideneds
- distributions to stockholders
1st Important Role of Financial Accounting
- to measure the relevant transactions of a company
2nd Vital Role of Financial Accounting
- communicate business activities to outside company - primary way of communicating is through financial statements
Financial Statments
- periodic reports published by the company for the purpose of providing information to external - 4 Primary Financial Statements
4 Primary Financial Statements
1. Income Statement
2. Statement of Stockholders' Equity
3. Balance Sheet
4. Statement of Cash Flows
Income Statement
- financial statement that reports the company's revenue & expenses over an interval of time
- shows whether the company was able to generate enough revenue to cover the expenses of running the business
- AKA statement of operations & statements of income
How can you tell if a company is profitable from the Income Statement?
- If revenue exceeds expenses, a company has net income and is profitable
Statement of Stockholders' Equity
- financial statement that summarizes the changes in stockholders' equity over an interval of time
- the reporting period coincides with the time period covered by the income statement
2 Components of Stockholders' Equity
1. common stock - amounts invested by stockholders when they purchase shares of stock (external source)
2. retained earnings - cumulative amount of net income, earned over the life of the company, that has been retained in the business rather than distrib
Common Stock + Retained Earnings =
Stockholders Equity
Retained Earnings
- descriptive - the balance of retained earnings represents the amount of "earnings retained" (not paid out in the form of dividends) over the life of the company
- AKA Profits Reinvested in the Business
Dividends are NOT...
- Dividends represent the payment of cash but are not considered an expense in running the business
- not included as an expense in the income statement
Balance Sheet
- financial statement that represents the financial position of the company on a particular date
- financial position of a company is summarized by the basic accounting equation
Assets = Liabilities + Stockholders' Equity
- reports assets, liabilities, &
Resources of the Company
- cash
- accounts receivable
- supplies
- equipment
- expected to provide benefits to the company in the future
What are creditors' claims and owners' claims to the company's resources?
Balance sheet - the amount of total liabilities equals creditors' claims to the company's resources. The extent to which total assets exceed total liabilities represents owners' claims.
Statement of Cash Flows
- financial statement that measures activities involving cash receipts and cash payments over an interval of time
- Three Categories: operating, investing, & financing
Operating Cash Flows
- cash receipts and cash payments for transactions involving revenues and expenses
Investing Cash Flows
- generally include cash transactions for the purchase and sale of investments & productive long-term assets.
- Long-term assets are resources owned by a company that are thought to provide benefits for more than one year
Financing Cash Flows
- cash transactions with lenders, such as borrowing money & repaying debt, and with stockholders,
T/F: If total assets of a company equal $12000 & stockholders' equity equals $4000, then total liabilities equal $8000.
True
T/F: A corporation is an entity that is legally separate from its owners.
True
T/F: The statement of stockholders' equity is a financial statement that summarizes the changes in stockholders' equity over an interval of time.
True
T/F: The difference between revenues & expenses is referred to as net income.
True
T/F: If a company reports revenue of $17000 and expenses of $12000, then net income equals $5000.
True
The accounts which represent payments to stockholders are called:
Dividends
Which of the following groups is not among the external users for whom financial statements are prepared?
Managers
Which of the following items would not appear in an income statement?
Cash
The owners' interest in a corporation is called:
Stockholders' equity
Which business form has the advantage of limited liability?
Corporation
What is the primary purpose of financial accounting?
- measure business transactions & communicate those measurements to external users to make decisions
The accounting equations is defined as:
Assets = Liabilities + Stockholders' Equity
The form of business organization that is legally separate from its owners is a:
Corporation
Cost of providing goods & services to customers are referred to as:
- Expenses
Accounts that represent the resources of the company are called:
assets
The owners' interest in a corporation is called:
stockholders' equity
Revenue
amounts earned from providing goods and services to a customer
account type that represents payments to stockholders is called:
dividends
The accounts that represent resources owed to creditors are called:
liabilities
Correct order for preparing the financial statements:
income statement
statement of stockholders equity
balance sheet
GAAP
Generally Accepted Accounting Principles
- standards or methods for presenting financial accounting information
The assumption that a business will continue to operate into the future is
Going Concern Assumption
The assumption that the assets and liabilities of the business are accounted for on the books of the company but not included in the records of the owners is the:
Economic Entity Assumption