ACG 2021: Financial Accounting Week1 Ch. 1-2
ACG 2021: Financial Accounting Week1 Ch. 1-2 ACG2021
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This 9 page Class Notes was uploaded by Virginia Johnson on Monday January 18, 2016. The Class Notes belongs to ACG2021 at University of Florida taught by Goslinga,Jill Kristen in Fall 2015. Since its upload, it has received 86 views. For similar materials see Introduction to Financial Accounting in Accounting at University of Florida.
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Date Created: 01/18/16
Financial Accounting: ACG 2021 with Jill Goslinga Chapter 1: Financial accounting o Income statements (statements of operations) o Statement of retained earnings (including statement of stock holders' equity o Balance sheet (financial position) o Statement of cash flows Financial statements are the documents that businesses show to external groups like creditors, investors (in hopes of receiving an investment) or a governmental agency o The user groups can decide whether or not to invest in or loan money to the company Financial statements can tell us o The product selling the fastest o The most profitable product o Whether or not the company should expand operations Net income (profit) is more revenue (sales) than expenses Accounting Flow o 1-People make decisions o 2-Business transactions occur o 3-Companies report their results o Back to 1 Individuals make decisions o Manage personal bank accounts, whether or not to rent an apartment or buy a house, budget monthly income Investors and creditors o Investors: How much income they are expected to earn on an investment. o Creditors: when and how a company is going to pay them back Regulatory bodies o Internal Revenue Service (IRS), state and local governments require business, individuals and other types of organization Require businesses to pay income tax, property tax, excise tax and other taxes. o US Securities and Exchange Commission (SEC) Require companies whose stock is traded publically to provide it with many kinds of periodic financial reports Nonprofit organizations o Examples: churches, hospitals and charities Must file periodic reports of their activities with the IRS and state governments Financial Accounting vs. Management Accounting o Financial Accounting provides information for decision makers outside the entity (ex. Investors, creditors, government agencies and the public) o Management Accounting provides information for managers of The Gap, Inc. (ex. Budgets, forecasts, and projections) Organizing a Business o Proprietorship o Partnership o Limited-liability(LLC) o Corporation Proprietorship Partnership LLC Corporation Owner(s) Proprietor - Partners- two or Members Stockholders- one owner more owners generally many owners Personal liability Proprietor is General partners are Members are Stockholders are of owner(s) for personally personally liable ; not personally not personally business debts liable limited partners are liable liable not Proprietorship o Has a single owner, called a proprietor Ex: Small retail stores or solo providers of professional services- physicians, attorneys, or accountants (ex: Dell started out in the college dorm room of Michael Dell) A proprietorship is a distinct/ separate entity, separate from its owner. Business records should not include the owner's personal finances Partnership o Has two or more parties as co-owners and each owner is a partner Not a tax-paying entity. Each partner takes a proportionate share of the entity's taxable income and pays tax according to that partners individual or corporate rate EX: Retail establishments, professional service firms ( law, accounting…) real estate and oil and gas exploration companies Partners are governed by agreement General partnerships have mutual agency and unlimited liability, meaning each partner may conduct business in the name of the entity and can make agreements that legally bind all partners without limit for the partnership's debts This makes partnerships risky, because one bad/ irresponsible partner can create a lot of debt General partnership leads to the creation of limited-liability partnership (LLP) Each partner is liable for partnerships debts only up to the extent of his or her investment in the partnership. Each LLP, must have one general partner with unlimited liability to all partnership debts. Don’t set up papers with state Limited-Liability Company (LLC) o The business organization (not the owner) is liable for the company's debts. o LLC may have one or more owners called members o Members do not have unlimited liability for the LLC's debts o Members of an LLC effectively enjoy limited liability while still being taxed of partnership o Not a tax paying entity Have papers with the state o Combination of tax status and limited liability makes it popular Corporation o A business owned by the stockholders, or shareholders, who own stock representing shares of ownership in corporation o Corporation advantage - ability to raise large sums by selling stocks o All types of entities (individuals, partnerships, corporations or other types) may be shareholders in a corporation o Corporation is formed under state law. It is legally distinct from its owners o Stockholders of a corporation have limited-liability as do the partners and members of an LLC o Double taxation A corporation pays a business income tax Shareholders of a corporation are taxed on distributions received from the corporation (called dividends) o Corporation disadvantage- double taxation of distributed profits o Stockholders have control They elect the board of directors Board of directors sets policy and appoints officers They elect a chairperson who holds the most power and often is called CEO They also appoint the president as COO Explain and Apply underlying accounting concepts, assumptions and principles o Generally accepted accounting principles (GAAP) Accounting guidelines, formulated by the FASB that govern how accounting is practiced o Financial Accounting Standards Board (FASB) The regulatory body in the US the formulates generally accepted accounting principles (GAAP) o International Accounting Standards Board (IASB) sets global financial reporting standards o Objective of accounting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity Information must have Relevance Must be important Faithful representation Complete, accurate and free from bias Accounting objective - to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity Fundamental Qualitative Characteristics o Relevance (includes materiality) = make a difference or help predict or confirm values o Faithful representation = reliable Enhancing Qualitive Characteristics - Comparability, Verifiability, Timeliness, Understandability Constraints - Cost o = Financial Reporting Standards Comparability means that the accounting info for a company must be prepared in such a way as to be capable of being compared with info from other companies in the same period Verifiability means that the information must be capable of being checked for accuracy Timeliness means that the information must be made available to users early enough to help them make decisions, thus making the info more relevant to their needs Understandability means the info must be sufficiently transparent so the it makes sense to reasonably informed users of the info (investors, creditors, regulatory agencies and managers) Entity is any organization or person that stands apart as a separate economic unit. Managers need accounting for information for each division(entity) in the company. Continuity (going-concern) assumption holds that the entity will remain in operation for the foreseeable future Quitting concern (going out of business assumption) - an entity that is not continuing would have to sell all of its assets in the process. Most relevant measure of the value of the assets would be their liquidating values (or the amount the company can receive for the assets when sold in order to go out of business) Historical cost principle states that assets should be recorded at their actual cost, measured on the date of purchase as the amount of cash paid plus the dollar value of all noncash consideration also given in exchange. At the point of purchase, $blah is both the relevant amount for the building's worth and the amount that faithfully represents a reliable figure for the price the company paid for it. Fair value, the amount that the business could sell the asset for , or the amount that the business could pay to settle the liability. Stable-monetary-unit assumption - reason for ignoring the effect of inflation in the accounting records, based on the assumption that the dollar's purchasing power is relatively stable. o Ignoring inflation allows us to add or subtract dollar amounts as through the dollar over successive years has a consistent amount of purchasing power Chapter 2: Transactions o event with a financial impact on the business o Can be reliably measured o Has a giving side and receiving side on the action A=L+SE (OE) Account o Record of all the changes in a particular asset, liability or stockholder's equity Assets o Cash $, bank account balances, checks, certificate of deposit o Accounts Receivable Holds amounts promised to the company o Notes Receivable A more formal, binding amount promised to pay to the company that sometimes has interest o Prepaid Expenses Insurance, rent, prepaid supplies or services o Inventory Merchandise, products o Land o Buildings Office buildings, warehouses… o Equipment, Furniture and Fixtures Things like computers, machinery can depreciate in value Liabilities o Accounts payable The company's promise to pay a debt o Notes payable A more formal company promise to pay a debt o Accrued Liabilities Liability for an unpaid expense. Interest, Salary and Tax Payables Stockholder's Equity (or Owner's Equity) o Common Stock Account of owner's investments o Retained Earnings R/E : End R/E = Beginning R/E + Net Income - Dividends o Dividends Optional; money given to the stockholders o Revenues Increase in stockholder's equity, earned by selling products and services. (ex: service revenue account) o Expenses Cost of operating Increase in stockholders equity o Sale of stock and net income (when revenue is greater than expenses) Decrease in stockholders equity o Dividends and net loss (when expenses are greater than revenue) Dividends also reduce R/E Accounting equation: A=L+SE, must always be balanced Transaction Analysis o 1-Identifying the accounts affected o 2-deterwine whether the account is an A, L or SE? o 3- determine whether it increases or decreases o 4- the accounting equation must balance Double Entry Accounting o Business transactions have both a giving and receiving side o And has at least two accounts effected T- Account o On Top: Account Title o Left: Debit o Right: Credit Assets = Liabilities + Stockholders Equity Debit Credit Debit Credit Debit Credi + - - + - t + ASSETS = Liabilities + Stockholder's Equity Increase in Assets --> DEBIT Increase in Liabilities or Stockholder Equity --> CREDIT Increase in Revenues --> increase Net Income --> increase R/E --> increase SE --> CREDIT Increase in Expenses --> decrease Net Income --> decrease R/E --> decrease SE --> DEBIT Increase in Dividends --> decr. NI --> decr. R/E --> decr. SE --> DEBIT Debits do not always decrease an account and credits do not always increase it Journal o Chronological record of all company transactions Determine each account effected by the transaction Determine if each account is increased or decreased Record on journal Debits are listed first Credits are listed below and indented to the right Post to ledger Ledger o Grouping of all T-accounts with balances Bal o Balance (difference between total debits and total credits) of an account after posting in the ledger Trial Balance o Facilitates the preparation of financial statements o Lists all accounts with their balances 1-Assets 2-Liabilities 3-Stockholder's Equity o Side of debits and side of credits and totaled at the bottom Debits equal credits Chart of Accounts o 1-Balance Sheets: Assets, Liabilities and Stockholder's Equity o 2- Income Statement: Revenues and Expenses Normal Balance of an Account o Where increases are recorded (EX: Normal balance of assets is on the debit side) Assets Debit Liabilities Credi t SE Credi t Common Credi Stock t Retained Credi Earnings t Dividends Debit Revenues Credi t Expenses Debit
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