Financial accounting summary
Chapter 1 Accounting and the business environment
Accounting is the information system that measures business activities, processes the information
into reports, and communicates the results to decision makers.
Financial accounting is the field of accounting that focuses on providing information for external
decision makers. Such as investors who own a portion of a business, Creditors to whom the business
owes money and taxing authorities.
Managerial accounting is the field of accounting that focusses on providing information for internal
decision makers. Such as managers, employees, individuals and busineses.
Creditor is a person or business to whom a business owes money.
Types of accountants:
Certified Public Accountants (CPAs) are licensed professional accountants who serve the general
public.
Certified Management Accountants (CMAs) certified professionals who specialize in accounting and
financial management knowledge and often work for a single company.
Accountants generally work either in public (services) , private (working for a single company), or
governmental accounting.
Organizations and rules that govern accounting
Governing organizations:
The financial Accounting Standards Board (FASB) is a private organization that oversees creation and
governance of accounting standards.
The securities and Exchange Commission (SEC) U.S. governmental agency that oversees the
U.S. financial markets.
Economic entity assumption: An organization that stands apart as a separate economic unit.
Generally Accepted Accounting Principles (GAAP) The main U.S accounting rule book. Accounting
guidelines, currently formulated by the financial Accounting Standards Board (FASB).
The primary objective of financial reporting is to provide information useful for making investment
and lending decisions. To be useful, information must be relevant and have faithful representation.
Relevant information allows users of the information to make a decision.
Faithful representation: Providing information that is complete, neutral, and free from error.
Economic entity assumption is an organization that stands apart as a separate economic unit.
,Business organizations
Items that the business owns, assets. Items that the business has to pay later, liabilities.
The cost principle states that acquired assets and services should be recorded at their actual cost,
the actual amount paid.
Another reason for measuring assets at historical cost is the going concern assumption, assumes
that the entity will remain in operation for the foreseeable future.
During periods of inflation, a dollar will purchase less. But accountants assume that the dollar’s
purchasing power is stable. This is the basis of the monetary unit assumption, which requires that
the items on the financial statements be measured in terms of a monetary unit.
International financial reporting standards (IFRS) A set of global accounting guidelines, formulated
by the international accounting standards board (IASB)
International accounting standards board (IASB) The private organization that oversees the creation
and governance of international financial reporting financial standards (IFRS)
The SEC held companies to have their financial statements audited by independent accountants. An
audit is an examination of a company’s financial statements and records.
Sarbanes-Oxley act (SOX) requires management to review internal control and take responsibility for
the accuracy and completeness of their financial reports.
,Accounting equation
The basic tool of accounting, measuring the resources of the business (what the business owns or has
control of) and the claims to those resources (what the business owes to creditors and to the
owners) Assets = Liabilities + equity
Asset (activa bezit) is an economic resources that are expected to benefit the business in the future.
Something the business own or has control of. Examples: cash, merchandise inventory, furniture,
land.
Liabilites (passive) are debts that are owed to creditors. Many liabilities have the word payable in
their titles. Examples: Accounts payable, notes payable, salaries payable.
Equity (ev), The owners’ claims to the assets of the business. Increases in equity result from:
contributed capital and revenues. Decreases in equity result from: dividends, expenses.
Equity consists of two components:
Contributed capital (paid-in capital): is the amount invested in the corporation by its owners,
the stockholders. Common stock represents the basic ownership of every corporation.
Retained earnings
Net income revenues>expenses
Net loss revenues<expenses
Transaction is an event that affects the financial position of the business and can be measured with
faithful representation.
Step 1: identify the accounts and the account type
Step 2: Decide if each account increases or decreases
Step 3: Determine if the accounting equation is in balance.
The term on account can be used to represent either accounts receivable or accounts payable. If the
business will be receiving cash in the future, the company will record an accounts receivable. If the
business will be paying cash in the future, the company will record an accounts payable.
Financial statements are business documents that are used to communicate information needed to
make business decisions.
, Return on assets (ROA)= measures how profitably a company uses its assets.
Net income/average total assets.
Average total assets= (Beginning total assets + Ending total assets) / 2
