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Chapter 1 Notes

by: Jordan Notetaker

Chapter 1 Notes Acct 2010

Jordan Notetaker

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Financial Accounting 2010 - Holly Hawk, Section 004
Financial Accounting Concepts
Holly Hawk
Class Notes
Acct2010, ch1, connect, hhawk
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This 5 page Class Notes was uploaded by Jordan Notetaker on Thursday January 7, 2016. The Class Notes belongs to Acct 2010 at Clemson University taught by Holly Hawk in Fall 2016. Since its upload, it has received 77 views. For similar materials see Financial Accounting Concepts in Accounting at Clemson University.


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Date Created: 01/07/16
Accounting 2010 ­ Prof Holly Hawk, Section 004 Chapter 1: Business Decisions and Financial  Accounting (focus company: Sonic Gateway) Organizational Forms • Sole Proprietorship: a form of business that has one “sole” owner. ⁃ doesn’t require legal maneuvers; therefore the easiest to  start ⁃ requires business license ONLY ⁃ business=owner’s life assets ⁃ owner is liable for all gains and losses of the business • Partnership: like a sole proprietorship except with 2 or more owners ⁃ may require legal action to establish partnership agreement ⁃ agreement will describe in detail profit share and  course of action when/if new partner(s) join OR existing partner(s)  leave ⁃ why a partnership? more owners allow more access to  resources to help the growth of the business • Corporation: nothing like partnership or sole proprietorship  #soleentity ⁃ corporation is comprised of multiple owners HOWEVER  owners are not legally responsible for taxes and debts. ⁃ nothing more than initial investment can be lost ⁃ legal fees for erecting a corporation can be costly ⁃ income taxes must be paid by both the corporation and the  owners ⁃ why a corporation? lots of money can be made via a  corporation because of the availability to sell shares of ownership to new  owners ⁃ stockholders (owner’s of the company’s stock) can  buy and sell stock privately or publicly IF the corporation is really  registered to do so. ⁃ most corporations typically start out as private companies  and eventually apply to go public (done to generate new financiers— obtained by issuing new stock certificates to potential investors) ⁃ Cargill and Chick­fil­A are used as examples of companies  who have stayed private (see text pg. 4) • Limited Liability Company: partnership + corporation Accounting for Business Decisions • companies exist and are created to earn money for their respective  stockholders—that is achieved by selling goods and services to customers for  production cost. • Accounting: info system designed to capture the activities  determining the financial condition of an organization and then report the results  to stakeholders (i.e. any individual or group of individuals that hold STAKE in an  organization) in/outside the company • accounting terms are considered “the language of business” • Accountants are crucial to each and every company to keep  financial reporting transparent for decision­making purposes so that owners will  understand the effects of particular business moves • Accounting systems capture operating, investing, and financial  activities of a company so stakeholders are aware of the state of the business. • Managerial accounting reports consist of detailed financial plans  and continually updated reports explaining the operating performance of a  company. **only shared internally** ⁃ these documents are only shared internally so that these  people can take further action on business decisions related to production, marketing, HR, and finance. ⁃ ex. “should we buy? build? or rent?” managerial accounting  reports provide information to make those decisions  • Financial accounting reports(financial statements) are prepared  periodically to release information to people not employed by the business.  People/groups such as: ⁃ Creditors­ Suppliers, banks, and anyone else who is owed  money. Suppliers want to be assured they will be paid for the delivered  goods and services. Banks use these documents to evaluate potential risk in their past investment not being paid back. ⁃ Investors­ stockholders, potential and existing. This groups  use the reports to evaluate financial strength of the company and it’s  overall worth. ⁃ Directors­ members of the board of directors. Oversee the  company’s managers and use financial statements to ensure decisions  are being made with the interest of the stockholders in mind. ⁃ Government­ agencies like the SEC and the IRS look  closely at the financial reports. The SEC (Securities and Exchange  Commission) is responsible for monitoring the functions of the stock  market. The IRS (Internal Revenue Service), along with help from the  state and local governments use the information to make sure taxes are  being computed properly in accordance to specified guidelines. The Basic Accounting Equation WHAT A COMPANY OWES MUST EQUAL WHAT A COMPANY OWNS!! ASSETS = LIABILITIES(CREDITORS) + STOCKHOLDERS’ EQUITY • The basic accounting equation is the relationship between assets  (A), liabilities (L), and stockholders’ equity (SE). • The separate entity assumption require that the financial reports of  a business exclude personal dealings of stockholders and consist ONLY of the  activities of the business. • Assets: economic resources controlled by the company. The  purpose of an asset is to benefit the company via cash inflows and/or reducing  future cash outflows. For example, Nike and Target are companies that view  assets as inventory (or merchandise). • Liabilities: measurable amounts that the company owes to creditors. ⁃ When a company borrows form a bank, the liability owed is  called a note payable. ⁃ When a company borrows from another company. the liability owed is called an account payable.   ⁃ Creditors over stockholders, form the legal POV. Hence, if a  business goes out of business liabilities must be paid BEFORE  stockholders receive dues. • Stockholders’ Equity: owners’ claim on the business. These claims  arise because: ⁃ The owners have claim on their direct contributions to  receive stock (common stock)  ⁃ equity paid by stockholders ⁃  The owners have claim on the profits a business has  accumulated via operations (retained earnings) ⁃ equity earned by company ⁃ Retained earnings > Common stock because a business can only survive if it is retaining a profit. And that will only occur if total  earnings is greater than the costs of business. ⁃ These profits increase stockholder equity because  they belong to the company’s owners. This is how owners obtain a  return on their investment ⁃ Due to the importance of this, accounting systems divide  profits into two qualifying subcategories: revenues and expenses. ⁃ Revenues are earned by selling goods or services to  customers ⁃ Expenses are the costs of operating a business that are  essential to earning revenue ⁃ Net Income = revenues ­ expenses (profit generated) ⁃ this can be held onto or paid out to the stockholders ⁃ Dividends are the profits distributed to the stockholders from retained earnings and ARE NOT an expense incurred to generate  earnings (reported as a reduction in Retained Earnings) Financial Statements • The term “financial statements” refers to four accounting reports  compiled and filed in the order as follows: ⁃ Income Statement ⁃ Statement of Retained Earnings ⁃ Balance Sheet ⁃ Statement of Cash Flows • The Income Statement(statement of operations): the heading  includes the name of the business, the title of the report, and the time period covered by the financial statement. Larger business include a fourth line  indicating what form the values are in (millions, thousands, etc.). For international company, the fourth line can be used to tell what currency is being used  throughout the report. For instance, a company based in the US would convert  the foreign currencies to USD—this is called the unit of measure assumption. ⁃ the body has three major sections—revenues, expenses,  and net income (corresponding to the net income equation). Accounts are  individual types of revenues and expenses that are reported under their  respective sections. ⁃ when listing accounts—use descending order, in respect to  the net income equation i.e. revenues, expenses, then finally net. note that INCOME TAX EXPENSE is the last expense  ⁃ A single­step income statement is one where  the  revenues are grouped separately from the expenses and a single  measure of income is then reported. ⁃ Revenues DO NOT (necessarily) EQUAL cash coming in ⁃ Expenses DO NOT (necessarily) EQUAL cash going out • The Statement of Retained Earnings: a statement of SE that  explains changes in all SE accounts is provided by large corporations. ⁃ Statement starts with the balance at the beginning of the  period. ⁃ Next, the statement adds net income and subtracts  dividends.  ⁃ Dollar sign used at the top and bottom of the column and a  double underline appears at the bottom. • The Balance Sheet: also known as the “statement of financial  position”. purpose is to report business’ assets, liabilities, and stockholders’  equity at the given day. ⁃ acts as a snapshot of a business’s resources and claims to  resources at the end of the day. ⁃ Heading states name of company and title of statement ⁃ Unlike other reports, the purpose of the balance sheet is to  show projected values on a given day. ⁃ Liabilities are listed in order of settlement. ⁃ the balance sheet first lists the business’s assets; second,  the liabilities and SE’s of the business. ⁃ Cash is reported as the first asset, then accounts receivable.  ⁃ Cost principle states that assets are reported based on their original cost to the company. ⁃ Next accounts payable, note payable, then SE (common  stock and retains earnings). • The Statement of Cash Flows: the final report of interest to external  users. **only includes actions resulting in cash changing hands** ⁃ operating is the section that displays what directly relates to  the running of the actual business to generate profits. For example ads,  renting, services, etc. ⁃ investing focuses on the activities that solely involve buying  and selling of productive, long­lasting resources. ⁃ financing recounts any borrowing from banks, loans being  repaid, acquiring cash from stockholders for stock purposes, or paying off  dividends. • Notes to the Financial Statements: notes are used to help financial  statement users understand how the amounts are derived and what goes into  decision making when comprising the financial statements • Relationships among the Financial Statements:  ⁃ Net income is used to determine ending retained earnings  ⁃ Ending retained earnings is reported to the balance sheet  ⁃ The cash on the balance sheet is equal to the amount of  ending cash on the statement of cash flows. Careers that depend on Accounting Knowledge 1) Production and Operations Management 2) Human Resources (HR) 3) Finance 4) Marketing


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