-gives a more accurate depiction of the company
no incentive to look good
not bound by any rules
-for managers of the company/internal
Managerial Accounting
for investors/external decision makers
-common rules/guidelines for comparability
Financial accounting
What are the four primary financial statements issued by companies? What is the purpose of each? Which of them shows position vs. performance?
*Balance Sheet: position
-Assets, Liabilities, Equity
*Statement of Cash Flows: performance
-explains changes in cash during the period
-1) Operating Activities
-2) Investing Activities
-3) Financing activities
*Income Statement: performance
-Company's ea
What is the basic accounting equation?
Assets = Liabilities + Stockholder's Equity
What are assets/liabilities/stockholders' equity?
Assets: resources
Liabilities: Obligation
Equity: value obtained from sources other than debt
What is the basic equation for an income statement?
Revenues - Expenses = Net Income
increases in assets or settlement of liabilities
ongoing operations (e.g. sales or services)
not always immediately cash
REVENUES
decreases in assets or creation of liabilities from ongoing operations
e.g. rent expense, COGS
Expenses
Equation for retained earnings
Beginning Retained Earnings + Net Income - Dividends
What are the three types of cash flow activities on the Statement of Cash Flows?
Operating, Investing, Financing
Operating Activities
primary activities (includes INTEREST)
Investing Activities
sale or purchase of fixed assets
Financing Activities
transactions with bank or with investors (EXCEPT for interest, which goes in OPERATING; the principal would go under financing)
How do each of the four financial statements relate to the other statements?
Cash: on balance sheet and cash flow statement
Net income: on income statement and statement of R/E
Retained Earnings: on the statement of R/E and the Balance Sheet
the US government agency that determines the financial statements that the public companies must provide to stockholders and the measurement rules that they must use in producing those statements
Securities and Exchange Commission (SEC)
The measurement and disclosure rules used to develop the information in financial statements
Generally Accepted Accounting Principles (GAAP)
the private sector body given the primary responsibility to work out the detailed rules that become generally accepted accounting principles
Financial Accounting standards Board (FASB)
Role of an auditor?
to examine the financial reports to ensure that they represent what they claim and conform with generally accepted accounting principles