ACG2021 Chapter 1 (Principles of Financial Accounting)

Accounting is the information system that measures business activities, processes the information into reports, and communicates the results to decision makers.

Financial accounting provides information for external decision makers, such as outside investors, lenders, customers, and the federal government.

Managerial accounting focuses on providing information for internal decision makers, such as the company’s managers and employees.

Any person or business that is owed money by another party (debtor).



*debtor pronunced deter

-CPA
-CGMA
-CMA
-CFP

Cerified Public Accountant

They are licensed professional accountants who serve the general public



*The Association of International Certified Public Accountants (AICPA) Web site (http://www.thiswaytocpa.com) contains a wealth of information about becoming a CPA or CGMA

Chartered Global Management Accountant


They are professional accountants with advanced knowledge in finance, operations, strategy, and management.



*The Association of International Certified Public Accountants (AICPA) Web site (http://www.thiswaytocpa.com) contains a wealth of information about becoming a CPA or CGMA

Certified Management Accountants

Professional accountants who specialize in accounting and financial management knowledge



*You can find info of the CMA certification on the Institute of Management Accountants (IMA) Web site (http://www.imanet.org).

Certified Financial Planner


Certified professionals who speclizes in budgeting, saving for retirement, and mananging finances.

Deloitte

PwC (PricewaterhouseCoopers)

EY (Ernst & Young)

KPMG

The process of examining data, identifying trends, and drawing conclusions,

The presentation of data, trends, and conclusions in a graphical format

New York Stock Exchange (NYSE)

National Association of Securities Dealers Automated Quotations (NASDAQ)

Financial Accounting Standards Board
A private organization that oversees the creation and governance of accounting standards in the US.

Securities exchange commission
The SEC is the U.S. governmental agency that oversees the U.S. financial markets

Generally Accepted Accounting Principles

GAAP is the main U.S. accounting rule book/Accounting guidlines. formultaed by the FASB

International Accounting Standards Board


A private organization that oversees the creation and governance of International Financial Reporting Standards

International Financial Reporting Standards

Companies that are incorporated in or do significant business in another country might be required to publish financial statements using IFRS.


IFRS is a set of global accounting standards that is required by 144 countries/jurisdictions.

Providing information that is complete, neutral, and free from error.

An economic (business) entity is an organization that stands apart as a separate economic unit. We draw boundaries around each entity to keep its affairs distinct from those of other entities. An entity refers to one business, separate from its owners.

A person can vote on behalf of the share holders

-Each shareholder acts independently

-One shareholder cannot sign contracts, incur debts, or make promises that legally bind:

- the other shareholders

- or, the corporation itself



- Authority exists only if explicitly granted (e.g., officer role, board resolution, power of attorney)

The most that stockholders can lose is the amount they originally paid for the stock.

"The combination of limited liability and no mutual agency means that persons can invest unlimited amounts in a corporation with only the fear of losing whatever amount the individual has invested if the business fails. This attractive feature enables a corporation to raise more money than proprietorships and partnerships."

Federal and state income taxes: Corporate earnings are subject to double taxation. First, corporations pay their own income tax on corporate income. Then, the stockholders pay personal income tax on the dividends that they receive from corporations. This is different from sole proprietorships and partnerships, which pay no business income tax. Instead, the tax falls solely on the individual owners.

The stock holders

"Organization of a CorporationAs noted earlier, creation of a corporation begins when its organizers, called the incorporators, obtain a charter from the state. The charter includes the authorization for the corporation to issue a certain number of shares of stock, which represent the ownership in the corporation. The incorporators pay fees, sign the charter, and file the required documents with the state. Once the first share of stock is issued, the corporation comes into existence. The incorporators agree to a set of bylaws, which act as the constitution for governing the corporation. Bylaws are the rule book that guides the corporation."



1. Obtain A charter
2. Blylaws

*The BOD elects the chairperson of the board. The chairperson typically jas the most power.

*The BOD also typically elects the president.

That an acquired assets and services should be recorded at their actual cost (known as historical cost) and not fair value (The fair value is the market value, which is how much would get back to being sold).



So, if you buy land for \$20,000, in the next year you think the land is worth \$25,000, you will still record the land as \$20,000 (The amount you paid for it).

This assumes that the entity will remain in operation for the foreseeable future.

-This is a reason why accountants should use the histroical cost instead of the fair cost. If the business was going to fail in the future, then it would make sense to make use the fair cost since the company will have to liquidate it. But if the company will remain in the future, then it makes sense to base the cost on the amount the business paid for it.

Only items that can be measured in money are recorded in the accounting records, and money is treated as a stable unit of measure.

-So, they employee salary, not employee skills, which cannot be measured by money



-Also, Money is treated as a stable unit of measurment, so inflmation and deflation are ignored

An audit is an examination of a company’s financial statements and records. The independent accountants then issue an opinion that states whether the financial statements give a fair picture of the company’s financial situation.

-SOX requires management to review internal control and take responsibility for the accuracy and completeness of their financial reports.

-In addition, SOX made it a criminal offense to falsify financial statements.


-The Sarbanes-Oxley Act also created a new watchdog agency, the Public Company Accounting Oversight Board (PCAOB)

Public Company Accounting Oversight Board


monitors the work of independent accountants who audit public companies.

Assets = Liabilities + Equity

an economic resource that is expected to benefit the business in the future and something the business owns or has control over

The amount the business owes to a creditor.

*This also represents the amount the creditors claim to the business asset


*Many liabilities have the word "payable" in them. (ex, Accountant Payable, Notes Payable)

Equity represents the amount of assets left over after the company has paid its liabilities

Equity represents the companies net worth

Equity represents the claims to the assets of a business

Equity = Assets - Liabilities

Equity consists of two main components: contributed capital and retained earnings.

Contributed Capital

-Money or other assets that shareholders invest in the business in exchange for stock.


Retained Earnings

-Profits that are kept in the company, instead of being paid out as dividends.



The more profit the higher retained earnings. But giving out dividends would decrease this.

The total amount of money the business earned

The costs incurred to generate revenue or run the business.


ex), rent, advertising, salaries

Net Income: total revenues are greater than total expenses

Net loss: total reveues are less than total expenses

Dividends + Revenues - Expenses

Beginning Equity + issuance of common stock -Dividend distribution + Revenues - Expenses

=

Ending Equity

A transaction is any event that affects the financial position of the business and can be measured with faithful representation.

*although recessions can effect the financial position of a company, accountants don't measure that since it cannot be relaiblliy measured in dollars.

"buying on account"

If the supplies are expected to be consumed in 12 months or less, most companies will record the supplies as an expense instead of an asset.

The promise to recieve payment from consumers in the future.

(ex, business does a service for \$3000, but will get paid next month)



*Accounts would say that the business did the service "on account"

*Account payable is the opposite, meaning the business owes somone else money

To record an increase in cash and a decrease in account recievables


epxlanantion: You have an account recievabke for \$2,000. This is listed as an asset. But, when you actually recieve it, now you label that \$2,000 as cash.

(Also known as a statment of earning)

Shows the revenue and earning of a business and wether the business enjoyed net income or suffered net loss.


Net income: Revenue > expenses

Net Loss: Expense > Revenue

Net Income = Revenue - Expenses

(Also known as the statment of financial position)

Reports cash coming in and cash coming out

*Would not include purchases on account or Account recivbles

1. Operating Activities

-Cash recipets for services provided

-Cash payment for expenses



2. Investing Activities

-from buying/sell long-term assets



3. Financing Activities

-Cash from issuing shares

-Cash from borrowing

Cash (or other forms of money) recived by a business

"Cash" since its the most liquid

1. Income Statment

2. Statments of retianed earnings

3. Balance Sheet

4. Statment of Cash Flow

Return on Assets (ROA)

ROA = Net Income / Average Total Assets



Average Total Assets =

(Beginning Total assets + Ending total assets)/2


Beginning Total Assets: The total value of all assets at the beginning of the accounting period (e.g. start of the year)


Ending Total Assets: The total value of all assets at the end of th eaccounting period (e.g. end of the year)


*The higher ROA, the better, since higher rate of return

Income Statment

External: Outside of the organzaiton and hold no authortiy


Internal: Have authority in the business and belong to the organization

NO!

1) The business is paying 1,800 to what they owe. So they are paying an account payable in the liability section using cash

NOT THE SECOND ONE

Its profit pretty much. Revenue - Expenses = Net Income