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Summary Financial management exam 1 year 1
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Exam summary of the first financial management 1 exam
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Types of businesses1. Service company - provide services
2. Merchandising businesses - sell products
3. Manufacturing businesses - change basic inputs into products that are sold
Accounting
Can be defined as an information system that provides reports to users about the economic
activities and condition of a business.
Managerial accounting / management accounting
The area of accounting that provides internal users with information
(internal users = managers and employees)
Private accounting
Managerial accountants employed by a business are employed in private accounting
Financial accounting
The area of accounting that provides external users with information is called financial
accounting.
(external users = investors, creditors, customers and the government)
Public accounting
Accountants and their staff who provide services on a fee basis are said to be employed in
public accounting.
Ethics
Are moral principles that guide the conduct of individuals
Certified public accountants (CPA’s)
Public accountants who have met a state’s education experience, and examination
requirements
Accounting standards
Are the rules that determine the accounting for individual business
Accounting principles and assumptions
provide the framework upon which accounting standards are constructed
To provide information that is useful for decision making, financial reports must possess two
important characteristics:
1.Relevance
Information has the potential to impact decision making
2.Faithful representation
Means that the information accurately reflects an entity’s economic activity or condition
Financial accounting and generally accepted accounting principles are based upon the
following assumptions:
, 1. Monetary unit
2. Time period
3. Business entity
4. Going concern
Monetary unit = requires the financial reports be expressed in a single money unit, or
currency. This provides a common measurement of the effects of economic events and
transactions on an entity.
(U.S.A → U.S dollar is the monetary unit)
Business entity = Limits the economic data in financial reports to that directly related to the
activities of the business.
Going concern = requires that financial reports be prepared assuming that the entity will
continue operating into the future
Assets = liabilities + stockholders equity
Dividends
Distributions of earnings to stockholders
Accounting equation
- The effect of every transaction is an increase or a decrease on one or more
accounting equation elements.
- The two sides of the accounting equation are always equal
- The stockholders’ equity is increased by amounts invested by stockholders (common
stock)
- The stockholders’ equity is increased by revenues and decreased by expenses
- The stockholders’ equity is decreased by dividends paid to stockholders
Stockholders equity is classified as:
1. Common stock
2. Retained earnings
Retained earnings = The stockholders’ equity created from business operations through
revenue and expense transactions.
Financial statements:
1. Income statement
2. Retained earnings statement
3. Balance sheet
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