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Principles of Financial Accounting-Chapter 1

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by: Sarah Smithson

Principles of Financial Accounting-Chapter 1 202

Marketplace > University of New Mexico > Business, management > 202 > Principles of Financial Accounting Chapter 1
Sarah Smithson
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About this Document

These are the notes from the first week in class, covering a majority of chapter 1 from the powerpoint in class
Principles of Financial Accounting
Robert J. Tepper
Class Notes




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This 5 page Class Notes was uploaded by Sarah Smithson on Friday January 22, 2016. The Class Notes belongs to 202 at University of New Mexico taught by Robert J. Tepper in Spring 2016. Since its upload, it has received 28 views. For similar materials see Principles of Financial Accounting in Business, management at University of New Mexico.


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Date Created: 01/22/16
Chapter 1 Notes- In Class Forms of Business organization • Sole Proprietorship ◦ Single owner who receives all profits and losses ◦ Personally responsible for all debts ◦ Owner and Business one for tax purposes ◦ Pros: Simple to establish, owner controlled, no double taxation ◦ Cons: Owner has unlimited liability, difficult to obtain financing or transfer business • Partnership ◦ Partnership of two or more people ◦ Liable for actions and debts of each other ◦ Conduit for tax purposes; profits and losses flow through to partners ◦ Pros: Simple to establish, shared control, no double taxation ◦ Cons: Partners personally liable for the partners, (debts and torts: wrongful acts), may be difficult to transfer business • Corporation ◦ Separate legal ownership by shareholders who own stocl ◦ Profits may be held or paid as dividends ◦ Public traded corporations share trade on a national exchange ◦ Pros: Limited Liability, easy to transfer, confidence to raise capital, professional management ◦ Cons: Managers distant from owners, double taxation ◦ Most popular form of company, most LLC's (limited liability corporation, no personal liablitity) Tax advantages of a partnership Owners called members Economic Entity Concept • Economic affairs of the business should be separated from the affairs of the owner • Business and owner affairs should be kept separate Users of Accounting Information • External Users ◦ Investors and creditors ◦ Government agencies, labor unions • Internal Users ◦ Users within the business (managers) Accounting Equation Assets=Liablities+Stockholders’ Equity • Assets are economic resources • Liabilities are creditors claim to assets • Stockholders equity represents stockholders claim to assets Two Types of SE Accounts • Contributed capital ◦ owners investments • Retained earnings ◦ earnings generated by the business 4 Financial Statements • Income statement ◦ Revenues-expenses=net income (over a period of time) (example below) ◦ • Retained earnings statement ◦ BRE+NI-Dividend=ERE (over a period of time) (example below) ◦ Dividends are not an expense used to generate revenue so don’t belong on an income statement • Balance Sheet ◦ Assets=Liabilites+Stockholders Equity (at a point in time) (example below) ◦ • Statement of Cash Flows ◦ Cash flows from operating, investing, and financing activities (over a period of time) (example below) ◦ Interrelationship of Statements • Net Income on IS—> goes to STE—> Added to beginning retained earnings • ERE on the SRE will also appear on the balance sheet as a component of Stockholder’s equity • On comparative balance sheets, the difference between cash flows is explained by the statement of cash flows Annual Report • Contains audited financial statements, notes • Management discussion and analysis Auditors Report 2 • First paragraph ◦ Intro What statements have been audited? • Second Paragraph ◦ Scope paragraph Audit was conducted in accordance to US GAAS or PCAOB standards Designed to give reasonable assurance that financial statements are free of misstatements Evidence gathered on a test basis Assesses accounting principles and estimates • Third Paragraph ◦ Opinion Are the statements fairly presented in all material respects in accordance to GAAP Types of Opinions • Unqualified opinion ◦ Best for company ◦ Statements fairly present in accordance to GAAP • Qualified Opinion ◦ Statements fair, but exception/problem • Adverse opinion ◦ Exception/problem large and statements not fairly presented • Disclaimer of opinion ◦ Auditor cannot render opinion, will explian BIG PROBLEM IFRS vs. GAAP • IFRS developed by IASB ◦ Over 115 countries require or permit IFRS ◦ Principles based • GAAP developed by IASB ◦ Rules based Solving an ethical dilemma • Recognize an ethical question and the issues involved ◦ Relying on personal ethics/company code of conduct • Identify and analyze principle elements involved ◦ ie, Who are the stakeholders, what are their rights and responsibilities • Identify the alternatives and their effects on various stakeholders ◦ Choose the “best” alternative 3 Types of Business Activities Financing Activities • In starting a business, owners need funds • May borrow from others (create a liability) ◦ Note payable, bonds payable • May sell shares of stock Investing Activities • Buying or selling physical or financial assets for the firm Operating Activities • Firms sell products and services • Operating activities relate to why the firm is in business (primary activities) • Revenues generated from sales of products and services • Expenses are incurred in generating revenues Elements of Financial Statements Balance Sheet Elements • Assets ◦ Economic resources of the firm ◦ Provide economic benefits Cash Accounts receivable Property, plant, and equipment ◦ Liabilities Obligation of the firm Most liabilities settled by transferring cash Creditors claims on firm Accounts payable, bonds payable ◦ Stockholders Equity A residual amount Total Assets-Total Liabilities Stockholders equity may be increased by owners transferring assets to the firm (investments by owners) or decreased by transfers back to the owners (distributions to owners) Stockholders equity represents the owners claims on the firm Income Statement Elements • Revenues ◦ Inflow of assets usually from the firms primary activites • Expenses ◦ Outflow of assets or incurring liabilities from the firm’s primary activity 4 • Gains ◦ Increases in equity from peripheral or incidental transactions (not the firms primary activity) • Losses ◦ Decreases in equity from peripheral or incidental transactions 5


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