ACCT200 Chapter 1 FULL
ACCT200 Chapter 1 FULL ACCT 200 006
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This 12 page Bundle was uploaded by Randi myers on Wednesday September 2, 2015. The Bundle belongs to ACCT 200 006 at University of Tennessee - Knoxville taught by Vicki L Mayfield (P) in Fall 2015. Since its upload, it has received 30 views. For similar materials see Foundations of Accounting in Accounting at University of Tennessee - Knoxville.
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Date Created: 09/02/15
Accounting 200 Dr Mayfield Chapter 1 The Role of Accounting in Business Stakeholders Entities with an interest in the business people who care about the successfailure of a business 0 External Stakeholders outside the business 0 Capital Market Stakeholders provide financing for a company to begin and continue its operations Lenderscreditors banks lend money to the business a Want it paid back with interest OwnersStockholders invest money in the business a Want a return on investment 0 Product or Service Market Stakeholders purchase the company s products or services or sell their products or services to the company Suppliers sell goods or services to the business Customers buy goods or services 0 Government Stakeholders federal state local and foreign collect taxes from the business and regulate business activities 0 Internal Stakeholders inside the business 0 Business Managers and Employees operate the business to earn profit Depend on continued success of the company Accounting an information system hat provides reports to stakeholders about the economic activities and condition of a business 0 Provides information to both external and internal stakeholders so they can 0 Evaluate the company s current health 0 Evaluate the company s future prospects Branches of Accounting 0 Financial Accounting preparing reports for external stakeholders 0 gives historical information to external stakeholders about Changes in financial condition during a period of time 0 Financial condition at a single point in time Snapshot of the business Managerial Accounting guide internal stakeholders to help with decisions about future 0 Projected financial statements 0 Daily progress reports Accounts and Financial Statements 0 Accounts summarize the effects of business transactions 0 Six account categories Assets resources used to create value a Ex property plant equipment Liabilities creditors claims on a business s assets Equity Owner s claims on assets Revenues sales fees earned Expenses fees used Dividends portion of profit paid to owners 0 Financial statements report financial condition of a business at a point in time and changes in the financial condition over a period of time 0 Four basic financial statements 0 Income statement Reports change in financial condition over a period of time o Retained earnings statement Reports change in financial condition over a period of time 0 Balance sheet Reports financial condition at a single point in time 0 Statement of cash flows Reports change in financial condition over a period of time Income Statement 0 Reports changes in financial conditions due to the operations of the company 0 During a period of time 0 Revenue Expenses Net Income Net Loss 0 Matching Concept setting expenses against revenues 0 Net Loss when expenses exceed revenues 0 Net Income when revenue exceed expenses Retained Earnings Statement 0 Changes in financial condition due to changes in retained earnings for a period Retained earnings the portion of a corporations net income that is retained in the business 0 A corporation may keep all of net income fro expanding operations or pay a portionall as dividends 0 Beginning Retained Earnings sum of all prior net income dividends paid Net income from income statement Dividends Ending retained earnings equity on balance sheet at the end of this period Balance Sheet 0 Reports financial condition as of a point in time Assets claims rights to the assets 0 Claims on company s assets consist of liabilities and stockholders equty o Liabilities rights of creditors o Stockholders owners equity rights of stockholders AssetsLiabilities stockholders equity 0 Accounting equationquot 0 reports financial condition of business on the last day of each accounting period 0 final result of the integrated financial statements Statement of Cash Flows 0 Reports change in financial condition due to the changes in cash during a period 0 Shows cash inflows revenue borrowing investments and cash outflows expenses 0 Organized around the three business activities 0 Operating investing financial 0 Net cash from operating activities net cash from investing activities net cash from nancing activities change in cash Business Activities 0 Operating activities using assets to earn revenues and profits O 0 Business engages in daytoday activities that generates revenues and expenses Day to day operations Customers and suppliers Revenue increase in assets from selling products or services Sales revenue received from selling products Fees earned revenue received from providing services Expenses costs used to earn revenue Cost of merchandise sold cost of sales cost of goods sold cost of the products sold Selling expenses costs directly related to the selling of a product or service Administrative expense other costs not directly related a Officer salaries Net income revenue exceeds expenses Net loss expenses exceed revenue Investing activities to obtain assets such as buildings and equipment to begin and operate company 0 0 Selling or buying assets with life greater than one year Purchasing Tangible assets physical resources Longterm tangible assets machinery buildings and land property plant and equipment Shortterm tangible assets cash and inventories Intangible assets patent rights to use in manufacturing a product nonphysical resources Longterm assets patents goodwill and copyrights are sold separately Prepaid expenses insurance or rent assets until they are consumed Accounts receivablerights to payments from customers who purchase merchandise or services on credit Financial activities to obtain necessary funds to organize and operate the company 0 Getting funds to start or grow the company 0 Debt Financing cash is acquired by borrowing This creates an asset cash an equal liability a payable 0 Equity financing cash is acquired by selling pieces of ownership in the company to investors This creates and asset and an equal equity Business Types 0 Business an organization that sells goods or services to customers 0 Service business 0 provides services to customers 0 does not sell goods Merchandising business 0 Buys finished goods from manufacturers and sells them to customers 0 middleman Manufacturing business 0 Buys basic inputs materials labor from suppliers Converts them into products for sale to customers usually merchandisers o All three business types can operate in any of four business forms Business Forms Proprietorship owned by one individual owner 0 Organization is easy and low cost 70 of US business are proprietorship 0 Resources are limited to the one owner or assets that the owner can borrow o Entity not a separate legal entity from owner owner is liable for all business debt no limited liability 0 Income tax one level of taxation owner pays tax individually on business income 0 Partnership owned by two or more individuals 0 Organization is fairly easy and inexpensive 10 of US businesses 0 Resources may outgrow resources Faces difficulties raising a lot if the business gets too large cannot issue stock o Entity separate legal entity from partners but each general partner is legally liable for the actions of the other partners no limited liability 0 Income tax one level of taxation partners pay tax individually on business income 0 Corporation owned by more than one individual or entity stockholders 0 Organization is difficult and expensive 0 Resources advantage of corps can obtain large amounts of resources by issuing stock 0 Entity organized under federal or state statutes as separate legal entity Separate from stockholders at risk of only the amount they invest limited liability 0 Income tax two levels double taxation of business income Corporation pays tax on business income Stockholders pay tax on dividends received from the corporation 0 Limited Liability company LLC owned by more than one individual or entity members 0 Combines partnership and corporation 0 Organization is easy and inexpensive 0 Resources can raise more than proprietorships but faces difficulties raising a lot if business is too large cannot issue stock 0 Entity separate legal entity from members at risk for only amount they invested limited liability 0 Income tax one level of taxation treated like partnership for tax purposes members pay tax individually How do businesses make a profit 0 Revenues amount the business earned expenses costs the business incurred net income profit or net loss if expenses exceed revenue 0 Profit is increased by increasing revenue or decreasing expenses 0 Business strategies gaining a competitive advantage Business activities 0 Lowcost strategy where a company designs and produces products or services at a lower cost than its competitors Often standardized products no frills Standard products 9 lower prices Examples Kroger Walmart Kia o Premiumprice strategy where a company designs and 39produces produc e vices that serve unique market needs allowin premium higher prices often unique Acquire quality reliabi ity Oasrmag 9 higher prices inancingl Example39 Whole ods William amp Sonoma Mercedes The Business C cle 0 Make and sell goods or SBWICBS Operating from bank issue bonds 3 Day to day operations 2 Buy Property Plant and equipment trademarks 0 Financing money to start grow business 0 Debt financing cash is acquired by borrowing 0 Equity financing cash is acquired by selling pieces of ownership in the company to investors Investing sellingbuying assets with life greater than one year 0 Operating day to day operations Accounting Practice 0 Generally accepted accounting principles GAAP accounting rules Ensures comparability of information between companies and across time periods 0 Financial Accounting Standards Board FASB develop and write GAAP 0 Securities and Exchange Commission SEC an agency of the US government that attempt to o Regulates GAAP 0 protect investors o oversee private regulatory organizations in the securities accounting and auditing fields like FASB o investigate misrepresentation or omission of important information about securities 0 International Accounting Standards Board IASB write rules for non US companies Try to reduce differences US GAAP and accounting principles of foreign companies are in the process of being reconciled 9 will result in International Financial Reporting Standards IFRS Basic Accounting Concepts of GAAP 0 Business Entity Concept company is viewed as an entity separate from its owners creditors or other companies Record transactions of different entities separately 0 Cost Concept records assets at their historical cost amount recorded is what you paid regardless of what it is worth now 0 Asking price replacement cost or estimated cost are irrelevant 0 Going Concern Concept assume that a business is going to continue indefinitey unless otherwise indicated 0 Justifies use of cost concept o If there is strong evidence that a company is planning to discontinue operations then accounting records are revised Matching Concept records revenues for a period with the expenses incurred in generating the revenues Expenses are matched against the revenues Objectivity Concept requires that accounting records are based on objective and veri able evidence 0 Ex a purchase invoice or receipt Unit of Measure Concept in the US report all financial statement numbers in dollars Accounting Period Concept requires that data be recorded in financial statements for periods of time Report data on nancial statements in separate time units Adequate Disclosure Concept report all relevant data that users need to understand financial condition and performance of a business Ethics and Responsible Reporting Stockholders and creditors need accurate financial information from companies Businesses must establish and communicate standards of conducts for managers and employe o counteract o failures of individu 0 culture ofgreed difference 0 Fraud Triangle Opportunity rationalization pressure Guidelines for ethical conduct 0 1 Personal standards of honesty and fairness o 2 Consider effect of decisions on others 0 3 Consider obligation to others 0 make decision in light of effect on others 9215 808 PM 9215 808 PM
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