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Summary Introduction to financial accounting H. 1 - 2 - 3 - 4 - 5 - 7 - 8
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This summary includes: H. 1 - 2 - 3 - 4 - 5 - 7 - 8 of the book an introduction to financial accounting, 9th edition.
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Financial Accounting guide notes
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Financial accounting Q2
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Finance PowerPoint week 1 Accounting is the process of identifying, recording and summarizing economic information
and reporting it to decision makers. A method of communicating financial information to
employees and the public.
Accountants analyze information to be used b decision makers, then they create an
accounting system to meet decision maker’s needs.
Accounting system: - A serie of steps used to record financial data.
- Convert into informative financial statements.
- Provides information to decision makers.
Decision makers include: Managers, owners, investors, politicians.
Accounting shows where and when a company spends money and makes commitments, it
helps to predict future effects of decisions,
it helps to direct attention to: - Current problems
- Imperfections
- Inefficiencies
- Opportunities.
Financial accounting; serves external Management accounting; serves internal
decision makers decision makers
Stockholders Top executives
Suppliers Department heads
Banks People at other management levels
Government agencies
Annual report
Annual report: A document prepared by management and distributed to current and
potential investors.
Informs about the company’s past performance and future prospects; used by
investors and others outside the company.
Elements of annual reports
- Financial statements
- Letter from corporate management
- Discussion and analysis of economic events
- Footnotes explaining elements of financial statements
- Report of management and auditors on company’s internal controls
- Other corporate information
Balance sheet
Balance sheet: A statement of financial position; shows the financial status of companies at a
particular instant in time.
Two counter balancing sections: (1) Resources of firm (2) Claims against resources.
Forms of equations: Assets = liabilities + owners’ equity
Assets – liabilities = owners’ equity
Assets: - Economic resources
- Help generate future cash outflows
- Reduce or prevent future cash outflows
, Liabilities: - Economic obligations to outsiders
- Claims against assets by outsiders
- Notes payable: Promissory notes that are evidence of debt and state terms
payment
Owners’ equity (net assets): - Owners’ claim on assets
- Equal to total assets – liabilities
- Debt holders have first claim on assets.
Balance sheet transactions
Entity: An organization or section of an organization which stands apart from the other
organizations as a separate economic unit.
Transaction: An event effecting the financial position of an entity can be recorded in
monetary terms. Every transaction affects a balance sheet; at least 2 entries are recorded
(double accounting system).
Long-lived asset: An asset that a company expects to use for more than 1 year.
Transaction analysis
Transactions are recorded on company’s accounts.
Account: A summary record of changes in a particular asset, liability or owners’ equity.
Account balance: Total of all entries to the account per date.
For each transaction, the account determines:
- Which specific account the transaction affects.
- Whether it increases/decreases the account balance.
- The amount of changes in each account balance.
Inventory: Goods held by a company for the purpose of sale to customer.
Open account: Buying/selling on credit, usually by just an authorized signature of the buyer.
Account payable: A liability that results from a purchase of goods or services on open
account.
Compound entry: Affects more than two balance sheet accounts.
Sole proprietorship
A business with a single owner (the owner can also be a manager).
A separate entity distinct from its proprietor.
Owners personally liable for any obligations of the business.
Owners are active managers of the business.
Partnerships
Organizations that joins two or more individuals together as co-owners.
Each partnership is an individual entity > separate from personal activities of each partner.
Can have thousands of partners.
Partners personally liable for obligations of business; exception: Partners structured as a
Limited Liability Company (LLC).
Partners typically active managers of a company.
Corporations
Business organization that is created by individual state laws.
, Limited liability: A feature of the corporate form of the organization whereby corporate
creditors have claims against the corporate asset only; not against the personal assets of the
owners.
Ownership shares in most large corporations consists of publicly-traded stocks.
Shareholders: Purchasers of shares; there could be thousands of shareholders for large
publicly-traded corporations.
Privately owned corporations: Corporation owned by a family, a small group of shareholders,
or a single individual. Shares of the ownerships aren’t publicly sold.
Closely-held / unlisted are terms for privately owned corporations.
Advantages of the corporate form
Easy transfer of ownership; To sell shares in its ownership, the corporation issues:
- Stock certificates: Formal evidence of ownership shares in a corporation;
may be in Physical certificates or inform of brokerage account; can be sold to
others + buying and selling by stock exchanges.
Ease of raising ownership capital from potential stockholders.
Advantage of continuity of existence, even in case of change of ownership.
Tax laws may favor a corporation.
Owners’ equity
Corporation account for owners’ equity differently than sole proprietorships and
partnerships, the basic concepts remain the same for all three forms.
Owners’ equity is labeled as capital in proprietorships and partnerships; in accounts, it’s
shown as capital invested by the owners.
Stockholders’ equity/shareholders’ equity = Owners’ equity of a corporation = the excess of
assets over liabilities.
Paid in capital: Total capital investment in a corporation by its owners, both at and after the
inception of the business.
Par value/stated value: Nominal dollar amount printed on stock certificates.
Paid-in capital in excess of par value/ additional paid-in capital: Total amount received over
the par-value.
Total paid-in-capital: Capital stock at par value + Paid-in capital in excess of par value.
Common stock: Describes par value of stock purchased by common shareholders.
Common stockholders: The owners who have a residual ownership in the corporation, they
are not liable to receive the amount of paid-in capital accounts in future.
Board of directors: A body elected by the shareholders to represent them; responsible for
appointing and monitoring the managers, they’re a link between stockholders and managers.
Stockholders <elect> board of directors <appoint> managers
Chapter 1: Accounting the language of business
Objective 1: Explain how accounting information assists in making decisions:
Accounting: Process of identifying, recording and summarizing economic information and
reporting it to decision makers.
Financial accounting: The field of accounting that serves external decisionmakers such as
stockholders, suppliers, banks and government agencies.
The DOW: Dow Jones Industrial Average; the most commonly reported stock market index in
the world.
, Event <recorded + analyzed> accountants <summarized into> financial statements
<communicated to> users.
Management accounting: The field of accounting that serves internal decisionmakers, such
as top executives, department heads, college deans, hospital administrators, and people at
other management levels within an organization.
Annual report: A document prepared by management and distributed to current and
potential investors to inform them about the company’s past performance and future
prospects.
Annual reports include:
1) A letter from corporate management;
2) A discussion and analysis by management of recent economic events;
3) Footnotes that explain many elements of the financial statements in more detail;
4) The report of the independent auditors;
5) A statement of management’s responsibility for preparation of the financial statements;
6) Other corporate information.
Form 10-K: A document that U.S. companies file annually with the securities and exchange
commission. It contains the companies’ financial statements.
Primary questions concerning a firm’s financial success that decision makers want answered
are:
- What is the financial position of the organization on a given day?
- How well did the organization do during a given period?
Accountants answer these question with 3 major financial statements:
- Balance sheet: Focuses on the financial picture as of a given day;
- Income statement: Focuses on the performance over time;
- Cash flow statement: Focuses on the performance over time.
Objective 2: Describe components balance sheet
Balance sheet (statement of financial position): A financial statement that shows the financial
status of a business entity in a particular instant in time.
Balance sheet equation: Assets = Liabilities + Owner’s equity
The League of American Communications Professionals (LACP) rates annual reports based on
how well they communicate their messages.
Assets: Economic resources that a company expects to help generate future cash inflows or
help to reduce future cash outflows.
Liabilities: Economic obligations of the organization to outsiders, or claims against its assets
by outsiders.
Notes payable: Promissory notes that are evidence of a debt and state the terms of payment.
Owners’ equity: The owner’s claims on the organizations assets, or total assets – liabilities.
Entity: An organization/section of an organization that stands apart from other organizations
and individuals as a separate economic unit.
Transaction: An event that both affects the financial position of an entity and that an
accountant can reliable record money terms.
Objective 3: Analyze business transactions and relate them to changes in the balance sheet
Long-lived asset: An asset that a company expects to provide services for more than 1 year.
Account: A summary record of the changes in a particular asset, liability or owners’ equity.
, For each transaction, the accountant determines:
1) Which specific account the transaction affects.
2) Whether it increases/decreases each account balance.
3) The amount of change in each account balance.
Inventory: Goods held by a company for the purpose of sale to customers.
Open account: Buying/selling on credit, usually by just an authorized signature of the buyer.
Account payable: A liability that results from a purchase of goods or services on open
account.
Compound entry: A transaction that affects more than two accounts.
Creditor: A person/entity to whom a company owes money.
Objective 4: Compare the features of sole proprietorship, partnerships and corporations
Sole proprietorship: A business with a single owner. (Personal liable)
Partnership: A form of an organization that joins two or more individuals together as co-
owners.
Corporation: A business organization that’s created by individual state laws.
Limited liability: A feature of the corporate form of an organization whereby corporate
creditors (banks/suppliers) ordinarily have claims against the corporate assets only, not
against the personal assets of the owner.
Publicly owned: A corporation that sells shares in its ownership to the public.
Privately owned: Corporation owned by a family, small group of shareholders, or a single
individual, in which shares of ownerships aren’t publicly sold.
Capital stock certificate (stock certificate): Formal evidence of ownership shares in a
corporation.
Objective 5: Identify how the owner’s equity section in a corporate balance sheet differs from that
in a sole proprietorship or a partnership.
Stockholders’ equity (shareholders’ equity): Owner’s equity of a corporation. The excess of
assets of liabilities of a corporation.
Paid-in capital: The total capital investment in a corporation by its owners both at and
subsequent to the inception of business.
Par value (stated value): The nominal dollar amount printed on stock certificates.
Paid-in capital in excess of par value (additional paid-in capital): When issuing stocks, the
difference between the total amount of the company receives for the stock and the par
value.
Common stock: Par value of the stock purchased common shareholders of a corporation.
A board of directors: A body elected by the shareholders to represent them. It’s responsible
for appointing and monitoring the managers.
Stockholders <elect> board of directors <appoint> managers.
Chief Executive Officer (CEO): Top manager in an organization.
Objective 6: Describe auditing and how it enhances the value of financial information.
Auditor: A person who examines the information used by managers to prepare the financial
statements and attests to the credibility of those statements.
Public accountants: Accountants who offer services to the general public on a fee basis,
including auditing, tax work, and management consulting.
, Certified Public Accountant (CPA): In the U.S., a person earns this designation by meeting
standards of both knowledge and integrity set by a State Board of Accountancy. Only CPAs
can issue official opinions on financial statements in the United States.
Audit: An examination of a company’s transactions and the resulting financial statements.
Auditor’s opinion (Independent opinion): A report describing the scope and the results of an
audit. Companies include the opinion with the financial statements in their annual reports.
Private accountants: Accountants who work for businesses, government agencies, and other
non-profit organizations.
Billings: Total amounts charged to clients for services rendered to them. (Sole proprietorship)
Four largest public international accounting firms are:
- Deloitte Touche Tohmatsu
- Ernst2Yong
- KPMG
- Price Waterhouse Coopers
Objective 7: Explain the regulation of financial reporting
Generally Accepted Accounting Principles (GAAP): The term that applies to all the broad
concepts and the detailed practices to be followed in preparing and distributing financial
statements. It includes all the conventions, rules, and procedures that together comprise
accepted accounting practice.
Financial Accounting Standards Board (FASB): The private sector body that is responsible for
establishing GAAP in the U.S. > Independent creature of the private sector consisting of
seven individuals who work full-time with a staff to support them.
FASB statements: Name for the FASB’s rulings on GAAP.
Securities and Exchange Commission (SEC): The government agency charged by the U.S.
Congress with the ultimate responsibility for authorizing the GAAP for companies whose
stock is held by general investing public. This public sector - private sector authority
relationship can be sketched as follows:
Congress (public)
↓
SEC (Security & Exchange Commission – public)
↓
FASB (Private)
Issues pronouncements on various accounting issues. These pronouncements govern the
preparation of typical financial statements.
International Accounting Standards Board (IASB): An international body established to
develop, in the public interest, a single set of high-quality, understandable, and enforceable
global accounting standards.
American Institute of Certified Public Accountants (AICPA): The principal professional
association in the private sector that regulates the quality of the public accounting
profession.
Sarbanes-Oxley act: A law passed by the U.S. Congress in 2002 that gave the government a
larger role in regulation the audit profession. It:
- Established the Public Company Accounting Oversight Board with powers to
regulate many aspects of public accounting and to set standards for audit
procedures.
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