CHAPTERS 1 & 2
CHAPTERS 1 & 2 ACCT 2010 (Accounting, Dr. Kohlmeyer)
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ACCT 2010 (Accounting, Dr. Kohlmeyer)
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This 13 page Bundle was uploaded by Catherine Feeney on Monday September 21, 2015. The Bundle belongs to ACCT 2010 (Accounting, Dr. Kohlmeyer) at Clemson University taught by Dr. Kohlmeyer in Fall 2015. Since its upload, it has received 29 views. For similar materials see Financial Concepts in Accounting at Clemson University.
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ACCOUNTING three partsof de nition of accounting 1 Analyzing the economic event 2 Recording the economic event 3 Summarization Accounting is not book keeping Accounting goes a lot further than book keeping Types of Businesses 1 Sole Proprietorship a person comes in and they are the whole company They set up their shop Disadvantage unlimited liability All on you Advantages too You get all the pro ts but also all the debits This is the most common type of business in US Bill Gates started as a Sole Proprietorship unlimited liability limited capital all pro ts came back to you 2 Partnership has two or more persons Formal agreement Says what percent of effort their going to put in and how much their gone get out If one person wants to get out of the partnership the contingencies should be in the agreement 3 Corporation separate legal entity The share holders are separate from the company Share holders are not liable but they lose money based on their shares Limited liability and easily transferable No agreements necessary you can just sell your stocks Share holders get dividends and then have to pay taxes Difference between Financial Accounting and Management Accounting This course is Financial Accounting Mgt Accounting is information provided to managers This information is internal it wouldn t go to share holders It is like planning a budget Financial Accounting is preparing analysis for banks regulators anyone outside the company This class is nancial accounting Records the assets and liabilities The Accounting Equation Assets Liabilities Owners Equity aka Capital or share holders equity Every economic event would ow through this equation If something happens on one side something has to happen on the other side to offset Assets anything you own with value Liabilities things we purchase now that we are going to pay for later Owners Equity 1 contributed capital money that is invested into the business 2 Retained earnings revenue pro ts Pro ts that are retained and kept in the company Dividends reduces share holders equity NEVER EVER EXPENSE Dividends are not an expense will not show up on income statement Page 11 Exhibit 3 Income Statement on power point Statement of Cash Flows Try to track how your getting cash and how your spending cash within you company Three sections 1 Cash ows from operating activities 2 Cash ows from investing activities 3 Cash ows from nancing activities Notes to Financial Statements most people are not going to read the notes at the end of the nancial statements This is where companies might try to trick people This section would have pending lawsuits how much of their equipment is leased GAAPGeneral Accepted Accounting Principals Who decides these rules Made by the Financial Accounting Standing Board They are accountants with CPA and they come up with the rules and information They try to make sure the information being provided is useful to shareholders 1 Relevance ex if the company is being sued 2 Faithful Representation that the info is accurate ethical conduct comes in here CHAPTER 2 Two ways To get Cash 1 Loans which is getting cash through debt 2 lnvestments assets that is used in the business Cost Principal whatever you pay for a particular item this is the cost that is recorded Balance sheet shows what you paid for it it doesn t matter if the value of it increases or decreases M14 in Book pg 77 Assets Liabilities Shareholders Equity Part Two sources of financing are available to businesses debt financing and equity financing Debt financing refers to money the business obtains through loans and equity financing refers to money a business obtains through owners contributions and reinvestments of profit A business is obligated to repay debt financing but it is not obligated to repay equity financing Part II Using a combination of debt and equity financing a company will start investing in business assets such as buildings equipment furniture and other assets that will be used to generate revenue The Debit Credit Frame Work Page 56 To understand this framework think of the accounting equation A L SE as an oldfashioned weight scale that tips at the equals sign Assets like Cash and Equipment are put on the left side of the scale and liabilities and stockholders equity accounts are put on the right Likewise each individual account has two sides with one side used for increases and the other for decreases Accounts increase on the same side as they appear in A L SEAccounts on the left side of the accounting equation increase on the left side of the account and accounts on the right side of the equation increase on the right So Assets increase on the left side of the account Liabilities increase on the right side of the account Stockholders equity accounts increase on the right side of the account Decreases are the opposite as shown in Exhibit 27 Use debits for increases in assets and for decreases in liabilities and stockholders equity accounts Use credits for increases in liabilities and stockholders equityaccounts and for decreases in assets If you increase an asset thats a debit If you decrease your cash that a credit Transactions and Other Activities Business activities that affect the basic accounting equation A L SE are called transactions Transactions are of special importance because they are the only activities that enter the financial accounting system Transactions include two types of events External exchanges involve exchanges in assets liabilities and stockholders equity that you can see between the company and someone else For example when Starbucks sells you a Frappucino it is exchanging an icy taste of heaven for your cash so Starbucks would record this in its accounting system Internal events do not involve exchanges with others outside the business but rather occur within the company itself For example when the company Red Bull combines sugar water taurine and caffeine something magical happens these ingredients turn into Red Bull Energy Drink Ledger all of the accounts are in this book called Ledger Trial Balance after all your transactions you go to your ledger account and then you take that amount and put in your trial balance Here all your debit and credits should all balance From the Trial Balance we do the balance sheet 65 Balance Sheet goes in order from your most liquid to your least liquid Cash is always your most liquid Current Ratio accesses your ability to pay current liabilities It is your current assets divided by current liabilities How do you know if something is current or long term If it is one year or less we call it a current assets If its one year or more we will call it a long term asset What does the current ratio tell you Whether current assets are sufficient to pay current liabilities A higher ratio means better ability to pay Studving the Accounting Method After having analyzed each transaction a systematic accounting process is used to capture and report its financial effects This process is called the accounting cycle because it repeats itself over and over For now we will focus on the first three steps Analyze Record and Summarize A transaction is an exchange or an event that has a direct economic effect on the assets liabilities or stockholders equity of a business Business activities that do not have direct or measurable financial effects on the company are not recorded in the accounting system When analyzing transactions two simple ideas are used The first idea is the duality of effects and the second is the basic accounting equation Duality of effects means that every transaction has a least two effects on the basic accounting equation You already know the basic accounting equation Just remember that the dollar amount for assets must always equal the total of liabilities plus stockholders equity for every accounting transaction Know M24 on page 77 for rst test a 187 b 30k2k 32k15k 213 c 30k5k 35k15k 233 d 35k20k l97 because the supplies are an asset but the money spent is a liability mesmn like this on EXAM Lets say you are told that the current ratio is 90 No more numbers given in the question Your current assets went down What is the effect on the current ratio Answer your current ratio would decrease because the current assets on the top is decreasing Ex 90100 90 then 801008 What if current assets and current liabilities both went down 10 What would happen to current ratio Ex 90100 90 then 8190 9 If they both go down the same percent there is no effect NOTES FROM READING THE TEXTBOOK CHAPTERS 1 amp 2 A sole proprietorship is considered a part of the owner39s life with all profits or losses becoming part of the taxable income of the owner and the owner being personally liable for all debts of the business A partnership is similar to a sole proprietorship except that profits taxes and legal liability are the responsibility of two or more owners instead of just one It is slightly more expensive to form than a sole proprietorship because a lawyer typically is needed to draw up a partnership agreement A corporation is a separate entity from both legal and accounting perspectives This means that a corporation not its owners is legally responsible for its own taxes and debts Thus owners cannot lose more than their investment in the corporation which is a major advantage to the owners Most corporations start out as private companies and will apply to become public companies go public if they need a lot of financing which they obtain from issuing new stock certificates to investors Accounting is an information system designed by an organization to capture analyze record and summarize the activities affecting its financial condition and performance and then report the results to decision makers both inside and outside the organization Accounting Language of Business He can hire an accountant to work as an employee of his business a private accountant or he can contract with someone like Laurie who provides advice to a variety of businesses a public accountant Managerial accounting reports include detailed financial plans and continually updated reports about the operating performance of the company These reports are made available only to the company39s employees internal users so that they can make business decisions related to production marketing human resources and finance financial statements which are prepared periodically to provide information to people not employed by the business These external financial statement users aren39t given access to detailed internal records of the company so they rely extensively on the financial statements The four main groups of external users are 1 creditors 2 investors 3 directors and 4 government what a company owns must equal what a company owes to its creditors and stockholders ln accounting there are special names for the items a company owns assets and the claims on these items by creditors liabilities and stockholders equity as shown below The relationship between assets A liabilities L and stockholders39 equity SE is known as the basic accounting equation separate entity assumptionwhich requires that a business39s financial reports include only the activities of the business and not the personal dealings of its stockholders An asset is an economic resource presently controlled by the company Liabilities are measurable amounts that the company owes to creditors Stockholders39 equity represents the owners39 claims on the business These claims arise for two reasons First the owners have a claim on amounts they contributed directly to the company in exchange for its stock Common Stock Second the owners have a claim on amounts the company has earned through profitable business operations Retained Earnings Revenues are earned by selling goods or services to customers Expenses are all costs of doing business that are necessary to earn revenues Although profit is used in casual conversation the preferred term in accounting is net income Net income is calculated as revenues minus expenses By generating net income a company increases its stockholders39 equity A company39s profits are accumulated in Retained Earnings until a decision is made to distribute them to stockholders in what is called a dividend Dividends are not an expense incurred to generate earnings Rather dividends are an optional distribution of earnings to stockholders approved by the company39s board of directors Dividends are reported as a reduction in Retained Earnings FINANCIAL STATEMENTS The term financial statements refers to four accounting reports typically prepared in the following order 1 Income Statement Statement of Retained Earnings Balance Sheet Statement of Cash Flows INCOME STATEMENT The body of an income statement has three major captions revenues expenses and net income corresponding to the equation for the income statement Revenues Expenses Net Income Individual types of revenues and expenses are reported under the revenue and expense headings These accounts as they are called are typical for most businesses whether small or big Notice that each major caption has an underlined subtotal and the bottom line amount for net income has a double underline to highlight it STATEMENT OF RETAINED EARNINGS A more comprehensive statement of stockholders39 equity that explains changes in all stockholders39 equity accounts is provided by large corporation The Balance Sheet The next financial report is the balance sheet It is also known as the statement of financial position The balance sheet39s purpose is to report the amount of a business39s assets liabilities and stockholders39 equity at a specific point in time Cash is the first asset reported on the balance sheet The order is assets liabilities accounts payable then stockholders equity THE STATEMENT OF CASH FLOWS The fourth financial report of interest to external users then is the statement of cash flows It includes only those activities that result in cash changing hands The statement of cash flows is divided into three types of activities 10perating These activities are directly related to running the business to earn pro t They include selling apps and services paying employee wages buying advertising renting a building obtaining insurance coverage and so on 2 Investing These activities involve buying and selling productive resources with long lives such as buildings land equipment and software purchasing investments and lending to others As Exhibit 16 shows SonicGateway expects to spend 20000 cash to purchase equipment and software 3 Financing Any borrowing from banks repaying bank loans receiving cash from stockholders for company stock or paying dividends to stockholders is considered a nancing activity Creditors are mainly interested in assessing 1 Is the company generating enough cash to make payments on its loan 2 Does the company have enough assets to cover its liabilities lnvestors expect a return on their contributions to a company The main goal of GAAP and IFRS is to ensure companies produce nancial information that is useful to existing and potential investors lenders and other creditors in making decisions about providing resources to the companies Information is relevant if it makes a difference in decision making and it is a faithful representation if it fully depicts the economic substance of business activities The usefulness of nancial information is enhanced when it is i timely ii veri able iii comparable and iv understandable Information is timely if it is available in time to in uence decision makers Ethics refers to the standards of conduct for judging right from wrong honest from dishonest and fair from unfair In response to frauds the government introduced new laws through the SarbanesOxley Act The Act requires top managers of public companies to sign a report certifying their responsibilities for the nancial statements maintain an audited system of internal controls to ensure accuracy in the accounting reports and maintain an independent committee to oversee top management and ensure that they cooperate with auditors QHAPTER TWQ A key activity for any startup company is to obtain financing Two sources of financing are available to businesses equity and debt Equity refers to financing a business through owners39 contributions and reinvestments of profit Debt refers to financing the business through loans A business is obligated to repay debt financing but it is not obligated to repay its equity financing After obtaining initial financing a company will start investing in assets that will be used after the business opens Business activities that affect the basic accounting equation A L SE are called transactions Transactions are of special importance because they are the only activities that enter the financial accounting system Transactions include two types of events 1 External exchanges These are exchanges involving assets liabilities andor stockholders39 equity between the company and someone else 2 Internal events These events do not involve exchanges with others outside the business but rather occur within the company itself Every company establishes a chart of accounts a list that designates a name and reference number that the company will use when accounting for each item it exchanges THE DEBITCREDIT FRAMEWORK to understand this framework think of the accounting equation A L SE as an oldfashioned weight scale that tips at the equals sign Assets like Cash and Equipment are put on the left side of the scale and liabilities and stockholders39 equity accounts are put on the right Likewise each individual account has two sides with one side used for increases and the other for decreases Accounts increase on the same side as they appear in A L SE Assets increase on the left side of the account Liabilities increase on the right side of the account Stockholders39 equity accounts increase on the right side of the account Decreases are the opposite know that always Left is debit dr right is credit cr Use debits for increases in assets and for decreases in liabilities and stockholders39 equity accounts Use credits for increases in liabilities and stockholders39 equity accounts and for decreases in assets The normal balance for an account is the side on which it increases Assets normally have debit balances whereas liabilities and stockholders39 equity accounts normally have credit balances In addition to requiring that A L SE the doubleentry system also requires that debits credits If either of these relationships is not equal then you know for sure that you39ve made an error that will need to be corrected Current Ratio CURRENT ASSESTS CURRENT LIABILITIES Current ratio Whether current assets are suf cient to pay current liabilities A higher ratio means better ability to pay Current means within the year
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