Chapter 1 Intro to Financial Accounting

Accounting 201 with Bokemeier at Michigan State University

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By: Joe Leger
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Financial Accounting
Created: 2011-09-05
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Accounting

A system that collects and processes (analyzes, measures, and records) financial information about an organization and reports that information to decision makers

Managerial Accounting

Developing accounting information for internal decision makers

Financial Accounting

Developing accounting information for external decision makers.

Creditor

Lender, a person or corporation that lends money to a business. (American Bank)

Dividends

A portion of what a company earns in the form of cash payments that is given to their shareholders.

Financing Activities

When a company borrows additional money or pays back money to its lenders and receives additional funds or pays dividends to owners

Investing Activities

When a company buys or sells items such as plant and equipment used in producing their product.

Balance Sheet

Statement of Financial Position, which reports the amount of assets, liabilities and stockholders' equity of an accounting entity at a point in time.

Asset= Liabilities + Stockholders' Equity

-Most financial statements include monetary unit sign ($) beside the first dollar amount in a group of items

-common to place a single underline below the last item in a group before a total or subtotal

-A dollar sign is also placed beside group totals and a double underline below

Basic Accounting Equation

Asset= Liabilities + Stockholders' Equity

-the BAE shows what we mean when we refer to a company's financial position

Assets

Probable future economic benefits owned by the business as a result of past transactions which have future value to the entity (Cash, Inventory, Accounts Receivable, Plant and Equipment, Land)

-Amounts shown for assets do not generally show the amounts for which the assets could currently be sold for, but rather the price paid. (historical cost principle)

-listed on the balance sheet by ease of conversion to cash

Liabilities

Probable debts or obligations of the business that result from past transactions and will be paid with assets or services in the future (Accounts payable, notes payable)

-listed on balance sheet by their maturity (due date)

Stockholders' Equity

Indicates the amount of financing provided by owners of the business and earnings.

-The investment of cash and other assets in the business by the owners is called contributed capital.

-The amount of earnings (profits) reinvested in the business (not distributed to stockholders in the form of dividends) is called retained earnings.

Income Statement

(Statement of income, statement of earnings, or statement of operations) reports the accountants primary measure of performance of a business, revenues less expenses during the accounting period.

Income Statement

Net Income= Revenues - Expenses

-Revenues are reported WHETHER OR NOT THEY HAVE YET BEEN PAID FOR.

-Expenses represent the dollar amount of resources the entity used to earn revenues in a period. (WHICH MAY BE PAID FOR IN A DIFFERENT ACCOUNTING PERIOD)

-Net Income does NOT equal net cash

Statement of Retained Earnings

Reports the way that net income and the distribution of dividends affected the financial position of the company during the accounting period.

Statement of Retained Earnings

Beginning RE + Net Income -Dividends

-Net income is taken from the income statement; dividends are distributions to stockholders

Statement of Cash Flows

Cash Flow Statement= reports inflows and outflows (receipts and payments) of cash during the accounting period in the categories of operating, investing and Financing.

STATEMENT OF CASH FLOWS

+/- Cash Flows from Operating Activities (CFO)

+/- Cash Flows from Investing Activities (CFI)

+/- Cash Flows from Financing Activities (CFF)

Change in Cash

CFO=directly related to earning income

CFI=related to the sale of the company's productive assets

CFF=directly related to the financing of the enterprise itself

Key Concepts

1. Net income from the income statement results in an increase in ending retained earnings on the statement of retained earnings

2. Ending retained earnings from the statement of retained earnings is one of the two components of stockholders' equity on the balance sheet.

3. The change in cash on the cash flow statement added to the beginning-of-the-year balance in cash equals the end-of-the-year balance in cash on the balance sheet.

Notes

(Footnotes) provide supplemental information about the financial condition of a company, without which the financial statements cannot be fully understood.

THREE BASIC TYPES OF NOTES

1. Provides descriptions of the accounting rules applied in the company's statements.

2. Presents additional details about a line on the financial statements

3. Provides additional financial disclosures about items not listed on the statements themselves.

Generally Accepted Accounting Principles (GAAP)

GAAP are the measurement rules used to develop information in financial statements

Securities and Exchange Commission (SEC) 1934= Government Agency that has broad powers to determines the measurement rules for financial statements that companies issuing stock to the public (publicly traded companies) must provide to stockholders

Financial Accounting Standards Board (FASB) sets GAAP, SEC has ultimate decision.

GAAP principles enforced by the FASB

1. Effects on the selling price of a company's stock.

2. Effects on the amount of bonuses received by management and employees.

3. Loss of competitive information to other companies.

Sole Proprietorship

An unincorporated business owned by one person. Legally the business and the owner are not separate entities. (unlimited liability)

Partnership

An unincorporated business owned by two or more persons, the business is set up contractually and the partners are not legally separate from the business (unlimited liability)

Corporation

A business incorporated under the laws of a particular state. Owners are referred to as stockholders (limited liability) and is the dominated form of business organization in the U.S. because

1. Limited liability

2. Continuity of life

3. Ease in transferring ownership (stock)

4. Opportunities to raise large amounts of money by selling shares to a large number of people.

-Primary disadvantage is that its income may be subject to double taxation

Sarbanes-Oxley Act of 2002

A response to enron, set internal control requirements

Public Company Accounting Oversight Board (PCAOB)

Created by Sarbanes-Oxley Act, oversees auditors and enforces the SEC laws as they relate to preparation of audit reports.

Investment Banking Course

Under education