Chapter 1 Introduction to Accounting and Business
Chapter 2 Analyzing Transactions
Chapter 3 The Adjusting Process
Chart of Accounts (accounts per classification, with definition)
This summary contains everything from the theory you need to know for your Financial Management Exam. With th...
Chapter 1 Introduction to Accounting and Business
Nature of Business
Business = an organization in which basic resources (inputs), such as materials and labor are
assembled and processed to provide goods or services (outputs) to customers.
Profit = The objective of most businesses is to earn profit. Profit is the difference between the
amounts received from customers for goods or services and the amounts paid for the inputs used to
provide the goods or services.
Types of businesses
Service Businesses = Provide services rather than products to customers
Merchandising businesses = Sell products they purchase from other businesses to customers.
Manufacturing businesses = Change basic inputs into products that are sold to customers
Role of accounting in business
Accounting = An information system that provides reports to users about the economic activities and
condition of a business
The process by which accounting provides information to users is as follows:
1. Identify users.
2. Assess users' information needs.
3. Design the accounting information system to meet users' needs.
4. Record economic data about business activities and events.
5. Prepare accounting reports for users
Managerial accounting = The area of accounting that provides internal users with information. The
objective of managerial accounting is to provide relevant and timely information for managers' and
employees' decision-making needs.
Private accounting = Managerial accountants employed by a business.
Financial accounting = The area of accounting that provides external users with the information.
External users of accounting include investors, creditors, customers, and the government.
Role of ethics in accounting and business
Ethics = Are moral principles that guide the conduct of individuals.
,Guidelines for behaving ethically:
1. Identify an ethical decision by using your personal ethical standards of honesty and fairness.
2. Identify the consequences of the decision and its effect on others.
3. Consider your obligations and responsibilities to those who will be affected by your decision.
4. Make a decision that is ethical and fair to those affected by it.
Opportunities for accountants
Public accounting = Accountants and their staff who provide services on a fee basis.
Certified Public Accountants (CPAs) = Public accountants who have met a state's education,
experience, and examination requirements. CPAs typically perform general accounting, audit, or tax
services.
Generally Accepted Accounting Principles
Generally accepted accounting principles (GAAP) = A collection of accounting standards,
principles and assumptions that define how financial information will be reported.
Accounting standards = The rules that determine the accounting for individual business
transactions.
Accounting principles and assumptions provide the framework upon which accounting
standards are constructed.
Characteristics of Financial Information
The primary goal of financial accounting is to provide information that is useful for decision making.
This must contain two important characteristics:
Relevant information has the potential to impact decision making.
Faithfull representation means that the information accurately reflects an entity's economic
activity or condition.
Assumptions
Financial accounting and generally accepted accounting principles are based on the following
assumptions:
Monetary input assumption = Requires that financial reports be expressed in a single
money unit, or currency.
Time period assumption = Allows a company to report its economic activities on a regular
basis for a specific period of time.
Business entity assumption = Limits the economic data in financial reports to that directly
related to the activities of the business.
Going concern assumption = Requires that financial reports be prepared assuming that the
entity will continue operating into the future.
Principles
In addition to the preceding assumptions, the following four principles are an integral part of financial
accounting:
Measurement principle = Determines the amount that will be recorded and reported.
Historical cost principle = Recording an item at its initial transaction price. Under historical
cost principle, amounts do not normally change until another transaction occurs.
, Revenue recognition principle = Determines when revenue is recorded in the accounting
records. Revenue is recorded when the services have been performed or the goods are
delivered to the customer.
Expense recognition principle = requires expenses to be recorded in the same period as the
related revenue.
Financial statements
Financial statements = The accounting reports providing information about transactions that have
been recorded and summarized, prepared for users.
The order in which the financial statements are prepared and the nature of each statement:
1. Income statement = A summary of the revenue and expenses for a specific period of time,
such as a month or a year.
2. Retained earnings = A summary of the changes in the retained earnings that have occurred
during a specific period of time, such as a month or a year.
3. Balance sheet = A list of the assets, liabilities, and stockholders' equity as of a specific date,
usually close of the last day of a month or a year.
4. Statement of cash flows = A summary of the cash receipts and cash payments for a specific
period of time, such as a month or a year.
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