ACC Chapter 1

• Three forms of business organization include

  1. Sole proprietorship

  • Simple to establish
  • Owner controlled
  • Tax advantages

  1. Partnership

  • Simple to establish
  • Shared control
  • Broader skills and resources
  • Tax advantages

  1. Corporation

  • Easier to transfer ownership
  • Easier to raise funds
  • No personal liability
• Accounting can be classified into two broad categories: managerial accounting and financial accounting. 

  • Managerial accounting deals with the methods accountants use to provide information to an organization’s internal users
  • This course doesn’t cover it 
  • Financial accounting provides information for external users
  • Financial accounting is to measure business activities of a company and to communicate those measurements to external parties for decision making purposes.
• Accountants communication information to → Investors and creditors who make decisions about companies → their activities are measure by accountants
• Role of financial accounting:

  • Provides a service to 
  • Make resources allocation decisions based on future activities
  • Evaluate performance based on past activities

  Accounting is the process of: identifying, measuring, recording, and reporting business activity in monetary terms

  • IS the language of business 
• Categories of business activities:

  • Financing activities- transactions the company has with investors and creditors
  • Investing activities- transactions involving the purchase and sale of resources that are expected to benefit the company for several years
  • With the necessary resources in place, the company is ready to being operations 
  • Operating activities- transactions that relate to the primary operations of the company (what we are in business to do)
• The Accounting Equation = Assets - Liabilities + Owner's Equity
• Revenues, Expenses, and Dividends:

  • Revenues- the amounts recognized when the company sells products or provides services to customers
  • Expenses- are the costs of providing products and services and other business activities during the current period
  • Net income- is the difference between revenues and expenses. Other common names for net income include earnings or profit. 
  • Dividends- are distributions to stockholders, usually in the form of cash payments.
  • Dividends are NOT expenses
• Communicating information/data to users

  • Four basic financial statements that summarize a business
  • Income statements
  • Statement of stockholders’ equity
  • Balance sheet
  • Statement of cash flows
  • Plus footnotes (endnotes actually)
  • Clarify and expand on information in financial statements
  • Plus MD & A
  • Opportunity to describe future plans and place past performance in context
• Income statement

  • Is a financial statement that reports the company’s revenues and expenses over an interval of time. 
  • If revenues > expenses, then net income
  • Net income = Revenues - Expenses 
  • If revenues < expenses, then net loss

  KEY POINT: The income statement compares revenues and expenses for the current period to assess the company’s ability to earn a profit from running its operations.
• Statement of Stockholders’ equity

  • Summarize the changes in stockholders’ equity over an interval of time 
  • Stockholders’ equity = Common Stock + Retained earnings 
  • Common stock represents the amounts invested by stockholders (the owners of the corporation) when they purchase shares of stock. 
  • External source of stockholders’ equity
  • Retained earnings balance represents all net income minus all dividends over the life of the company.
  • Internal source of stockholders’ equity
• Balance sheet

  • Presents the financial position of the company on a particular date
  • Financial position: Resources = Claims to resources
  • Assets = Liabilities + Stockholders’ equity
• Statement of cash flows: measures activities involving cash receipts and cash payments over an interval of time

  • Operating cash flow: cash receipts and cash payments for transactions involving revenues and expenses
  • Investing cash flow: generally include cash transactions for the purchase and sale of investments and productive long-term assets
  • Financing cash flow: cash transactions with lenders, such as borrowing money and repaying debt, and with stockholders, such as issuing stock and paying dividends
• Assumptions that underlie GAAP

  • Economic entity: states that we can identify all economic events with a particular economic entity
  • Monetary unit: in order to measure financial statement elements, we need a unit or scale of measurement
  • Periodicity: divides the economic life into an enterprise (presumed to be indefinite) into artificial time periods for periodic financial reporting
  • Going concern: states that in the absence of information to the contrary, a business entity will continue to operate indefinitely
  • It provides justification for measuring meany assets based on their original cost