ACC 101 Ch 1 Notes
ACC 101 Ch 1 Notes acc 101
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This 6 page Class Notes was uploaded by Ashley Notetaker on Friday January 29, 2016. The Class Notes belongs to acc 101 at DePaul University taught by joanna dabrowski in Summer 2015. Since its upload, it has received 25 views. For similar materials see Intro to Accounting 1 in Accounting at DePaul University.
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Clutch. So clutch. Thank you sooo much Ashley!!! Thanks so much for your help! Needed it bad lol
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Date Created: 01/29/16
ACC 101 – Chapter 1 Accounting – information system that measures, processes, and communicates financial information about a business or economic entity (unit that exists independently) Accounting measurement – measuring business activities by recording data about them for future use There are two categories of accounting: 1. Financial Accounting – provides info for EXTERNAL decision makers to evaluate how well a business achieves goals; shown on financial statements 2. Managerial Accounting – provides info about operating, investing, & financing activities for INTERNAL decision makers Bookkeeping – process of recording financial transactions and keeping financial records Management information Systems (MIS) – interconnected business subsystems, including accounting, that provide info needed to run a business To make an accounting measurement, four basic questions must be answered: What is measured? When should the measurement be made? What value should be placed on what’s measured? How should it be classified? Business transactions – economic events that affect business’s financial position Can be exchange of value (purchase, sale, payment, collection, loan) between 2 or more parties Can also be economic event that doesn’t involve exchange, like loss from natural disaster/theft, physical wear on equipment, accumulation of interest To be recorded, a transaction must relate DIRECTLY to a business entity Money Measure – concept that all business transactions are recorded in terms of money Monetary unit used depends on country in which business resides Exchange rate – value of one currency in terms of another For accounting purposes, a business organization is a separate entity – distinct not only from its creditors and customers but it’s owners (separate accounts for each) It should have its own set of financial records, and they should only refer to its own affairs Not legally separate! Forms of a business organization: 1. Sole proprietorship – business owned by 1 person a. Owner takes all profit or loss and is liable for all obligations 2. Partnership – business with 2 or more owners ACC 101 – Chapter 1 a. Partners share profit or loss according to prearranged formula b. Partnership must be dissolved if partner leaves or dies c. Unlimited liability which can be avoided by forming a limited liability partnership (LLP) 3. Corporation – business unit chartered by state and legally separate from owners a. Owners are called stockholders because ownership is represented by shares of stock b. Stockholder’s don’t directly control operations but elect board of directors c. Limited liability – risk of loss is limited to amount paid for shares i. Ex. In lawsuit, company pays, stockholders do not d. Stockholders can sell shares w/o dissolving corporation, so corporation’s life is unlimited Highest number of US business are proprietorships Highest revenue in US comes from corporations Formation and Organization of a Corporation Stockholders Board of Directors Management Invest in shares of Determines corporate Executes policy and capital stock & elect policy, declares carries out day-to- board of directors dividends, appoints day operations management Stockholders Share of stock – unit of ownership in a corporation Articles of Incorporation state max # of shares a corporation is authorized to issue Outstanding stock # of shares held by stockholders To invest, stockholders transfer cash or other resources to corporation and receive shares of stock in return Corporations may have more than one kind of stock, but here we refer only to common stock Board of Directors Decides on major business policies, authorizes contracts, sets executive salaries, arranges major loans with banks, and declares dividends Corporate governance – oversight of corporation’s management and ethics by board of directors - To strengthen this, boards must establish an audit committee made up of INDEPENDENT directors (those who don’t directly participate in managing the business) Management ACC 101 – Chapter 1 Consists of operating officers Appointed by board to carry out corporate policies and run daytoday operations Has duty of reporting financial results of its administration to board and stockholders Concepts Underlying Financial Position Financial position – company’s economic resources (cash, inventory, buildings, etc.) and the claims against those resources (called equities) at a particular time Corporations have two types of equities: 1. Creditors’ equities, such as bank loans 2. Stockholder’s equity Economic Resources = Creditors equities + Stockholder’s equity In accounting, economic resources are called assets and creditors’ equities are called liabilities Assets = Liabilities + Stockholder’s equity Accounting Equation! - The two sides of the equation must always be equal Assets – economic resources expected to benefit the company’s future operations. Includes… 1. Monetary items (cash & money customer owes to company) 2. Nonmonetary, physical items (inventories, land, buildings, equipment) 3. Nonphysical items (rights granted by patents, trademarks, copyrights) Liabilities – business’s present obligations to pay cash, transfer assets, or provide services to other entities in future. Includes… 1. Amounts owed to suppliers for goods/services bought on credit 2. Borrowed money 3. Salaries and wages owed to employees 4. Taxes owed to government 5. Service paid for ahead of time that has yet to be performed Stockholder’s Equity – represents claims by owners to the assets of the business What would be left if all liabilities were paid Two parts: 1. Contributed capital – amount stockholders invest in business. It’s typically divided between… a. Par value – amount per share that when multiplied by # of common shares becomes the corporation’s common stock amount b. Additional paidin capital – amount when value received is greater than par 2. Retained earnings – earnings of corporation since its inception, less any losses or dividends Revenues and expenses are the increases and decreases in stockholder’s equity that result from operating a business - Revenue > expenses = net income - Expenses > revenue = net loss ACC 101 – Chapter 1 - Retained earnings is accumulated net income minus dividends Dividends – distributions of resources, generally in the form of cash, to stockholders Financial Statements 1. Income statement – summarizes revenues and expenses over accounting period - Shows whether business had net income or net loss 2. Statement of retained earnings – shows changes in retained earnings over accounting period - Retained earnings are added to net income, then dividends are subtracted to find new balance - New retained earnings carries over to next month’s statement 3. Balance Sheet – shows financial position on a certain date, usually at the end of a month or year - Shows accounting equation 4. Statement of cash flows – focuses on liquidity and balancing of cash flows, which are organized into three major categories: a. Operating activities b. Investing activities c. Financing activities Relationship Among Financial Statements Statement of cash flows is related directly to other three statements - Net income comes from income statement - Dividends come from statement of retained earnings - Other items in statement represent changes on balance sheet Heading at the top of each statement identifies the company name, type of statement, and date/period being recorded Generally Accepted Accounting Principles (GAAP) Developed to provide guidelines for accounting to ensure financial statements are understandable to their users Organizations that issue accounting standards: 1. Financial Accounting Standards Board (FASB) 2. International Accounting Standards Board (IASB) Other organizations that influence GAAP: 1. Public Company Accounting Oversight Board (PCAOB) – government body that determines standards auditors must follow 2. American Institute of Certified Public Accountants (AICPA) – primary professional organization ACC 101 – Chapter 1 3. Securities and Exchange Commission (SEC) – governmental agency that sets and enforces accounting practices for companies whose securities are offered for sale to general public 4. Governmental Accounting Standards Board (GASB) – issues accounting standards for state and local governments 5. Internal Revenue Service (IRS) – interprets and enforces the tax laws that specify rules for determining taxable income Many companies of all sizes have their financial statements audited by an independent certified public accountant (CPA) - Not an employee of the company being audited and has no financial or other comprising ties to business - Audit – examination of company’s financial statements and accounting systems/records. Assures they were prepared in accordance w/ GAAP Professional Conduct Ethics – code that addresses question of whether actions are right or wrong Code of professional ethics requires CPAs to act with: - Integrity - Objectivity - Independence - Due care Fraudulent financial reporting – intentional preparation of misleading financial statements. Can result from distortion of records, falsified transactions, misapplication of various accounting principles Users of Accounting Information Management is responsible for ensuring a company meets its goals of profitability and liquidity Users with direct financial interest: investors & creditors Users with indirect financial interest: tax authorities, regulatory agencies, labor unions, advisors of investors and creditors, customers, economic planners A business is an economic unit that aims to sell goods and services at prices that will provide adequate return to its owners Two major goals of all businesses: 1. Profitability – ability to earn enough income to attract investment capital 2. Liquidity – ability to have enough cash to pay debts when they’re due All businesses pursue goals by engaging in: - Operating activities… buying, producing, selling goods; hiring employees; paying taxes ACC 101 – Chapter 1 - Investing activities… buying resources for operating business (land, buildings, equipment); selling resources when no longer needed - Financing activities… obtaining capital from creditors and company stockholders; repaying creditors; paying return to stockholders Financial analysis – use of financial statements to determine a business is well managed and achieving its goals Effectiveness of financial analysis depends on: - Performance measures: profitability is measured in net income, liquidity is measured by cash flow - Financial ratios: ratio of earnings to total assets assesses profitability, ratio of cash flows to total assets assesses liquidity
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