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College aantekeningen Financial Accounting
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Lecture notes of 25 pages for the course Financial Accounting at UVT (Lecture notes FA)
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Midterm 30% MC and open questionsFinal exam 70% MC questions
Chapter 1 – Financial Statements and Business Decisions
Accounting = the skill, system or job of keeping the financial records of a
business or person. Users of accounting information;
- Owner-manager = founder of business who also functions as
manager
- Creditors lend money for a specific period of
time and gain by charging interest on the money
they lend
- Investors buy ownership in the company in the
form of stock. Investors purchase stock in
businesses hoping to gain in two ways:
1. Sell ownership interest in the future for more
than they paid
2. Receive a portion of the company’ s earnings
in cash (dividends)
The accounting system
1. Bookkeeping
2. Financial acc.
3. Management acc.
4. Auditing
Financial accounting system
Provided info for external decision makers
(investors, creditors, suppliers, customers, government, …)
Info must be relevant, reliable, comparable and consistent
GAAP = Generally Accepted Accounting Principles
Accounting is an information system
- Measures business activities
o Financing activities = borrowing or paying back money to
lenders and receiving additional funds from stockholders or
paying them dividends
o Investing activities = buying or selling items such as plant
and equipment used in the production of beverages
o Operating activities = the day-today process of purchasing
raw tea and ingredients from suppliers, manufacturing
beverages, delivering them to customers, collecting cash form
customers, and paying suppliers
- Processes data into reports
- Communicates results to people and organizations
Accounting = the language of business
Management accounting system = generates info for internal decision
makers (managers throughout the organization)
, - Marketing managers and credit managers use customers’ financial
statements to decide whether to extend credit
- Purchasing managers use suppliers’ financial statements to decide
whether suppliers have the resources to meet our demand for
products
- Employees’ union and human resource managers use the
company’s financial statements as a basis for constant negotiations
overpay rates
Detailed plans and continuous performance reports
No standards of reliability
Management accounting vs. financial accounting
Main areas of differences
- Nature of report produced (general purpose vs specific purpose)
- Level of detail
- Regulations
- Reporting interval
- Time orientation
- Range & quality of information
Management accounting less constrained than financial accounting
The annual report = basic overview of the operational, financial and
extra-ordinary performance of a compony over a specific period compared
to previous periods. Basically, these are numbers and some notes,
explaining these numbers. Listed firms = complemented with a lot of
brand naming, marketing, etc.
Four basic financial statements summarize the financial activities of a
business
1. Income statement
o How well did the company perform during the year?
o Reports the revenues less the expenses of the accounting
period
o Income statement = profit & loss account
o Focus on financial performance over certain period
o Revenues = inflow of economic sources form operations
o Expenses = outflow of economic sources from operations
o Revenues = expenses + net income
2. Statement of stockholders’ equity
o How net income and dividends affect company’s financial
position at December?
o Reports the changes in each of the company’s stockholders’
equity accounts during the period
o Beginning balance + increase/ - decrease = ending
balance
3. Balance sheet
o What is the company’s financial position at December?
o What is accumulated wealth at end of period and what form
does the wealth take?
, o Balance sheet =
statement of Financial
Position
o Assets = resources
held by the business
o Liabilities = claim on
business assets by
non-owners
o Equity = claim on
owner of business
assets
4. Statement of cash flows
o How much cash did the company generate and spend during
the year?
o Reports inflows and outflows of cash during the accounting
period in the categories of operating, investing and financing
o Focus on cash receipts and payments over certain period
o +/- cash flows from operating activities (CFO)
o +/- cash flows from investing activities (CFI)
o +/- cash flows from financing activities (CFF)
o = change in cash
o + beginning cash balance
o = ending cash balance
Heading of a balance sheet
1. Name of the entity Le-Nature’s Inc.
2. Title of the statement Balance Sheet
3. Specific date of the statement December 31,2015
4. Unit of measure millions of dollars
Accounting entity = organization for which financial data are to be
collected
Chapter 2 – Investing and Financing Decisions and the Accounting
System
The balance sheet reports the financial position of an entity at a specific
date
- Active (left): assets (economic resources)
- Passive (right): liabilities and equity (sources of financing for
economic resources)
Basic accounting equation: assets = liabilities + stockholder’s
equity
Asset = a resource held by the business
When is an item treated as an asset?
- A probable future benefit exists
- The business has an exclusive right to control the benefit (owner)
- The benefit must arise from some past transaction or event (bought)
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