Week 1 Notes
Week 1 Notes ACCT 2110 - 002
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This 5 page Class Notes was uploaded by Cheyenne Hunt on Sunday January 31, 2016. The Class Notes belongs to ACCT 2110 - 002 at Auburn University taught by Elizabeth Miller in Winter 2016. Since its upload, it has received 35 views. For similar materials see Principles of Financial Accounting in Accounting at Auburn University.
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Date Created: 01/31/16
Chapter 1: Accounting and the Financial Statements Jan 15 Accounting The process of identifying, measuring, reporting, and communicating financial information Allows decision makers to make informed decisions and answer question Business Forms Sole Proprietorship o Easily formed- only takes an idea and a little startup money o Tax advantages- less government-regulated o Controlled owner- only one owner o Personal liability- any debts are to the sole owner o Limited life- business is based on the owner and her ability to obtain capital Partnership o Access to the resources and skills of other people- more ideas o Tax advantages- less government-regulated o Shared control- two or multiple owners o Personal liability- all debts are to the owners o Limited life- business is based on the owners and their ability to obtain capital Corporation o Easier to raise money- common stock o Easier to transfer ownership- company separate from owners o Limited liability- company separate from owners; all debts are by the company o More complex to organize- more rules o Higher taxes- more government-regulated o Business Activities Financing o The process of obtaining funds to begin and operate a business o Done by either issuing (selling) common stock or borrowing money o Creditor- person to whom money is being borrowed from o Liability- a debt; what is owed o Equity- owner’s claim on an asset Investing o The process of buying assets that are used in operations o Property, plant, and equipment Operating o The process of earning a profit o Revenue- the increase in assets that results from the sale of products or services o Expenses- the cost of assets used or the liabilities created o Net income= revenue-expenses, if positive=profit and if negative=loss o Communication of Accounting Information How much better off is the company at the end of the year than it was at the beginning? What are the economic resources (assets) of the company and the claims (liabilities and stockholders’ equity) against them? o Jan 20 o Financial Statements Balance Sheet- reports the resources owned by a company (assets) and the claims against those resources (liability and stockholders’ equity) at a specific point in time Income Statement- reports how well a company has performed its operations (revenues, expenses, and net income/loss) over a period of time Retained Earnings Statement- reports how much of the company’s income was retained in the business and how much was distributed to owners over a period of time Statement of Cash Flows- reports the sources and uses of a company’s cash over a period of time o Comparability of Financial Statements GAAP (generally accepted accounting principles) was developed by several different organizations over a number of years SEC (Securities and Exchange Commission) has the power to set accounting rules for publicly traded companies FASB (Financial Accounting Standards Board) is the primary accounting standard setter in the U.S.; works closely with IASB (International Accounting Standards Board) in its development of IFRS (international financial reporting standards) o Financial Accounting Equation (Balance Sheet) Assets= Liabilities + Stockholders’ Equity Owner o A company’s economic Creditor resources o On Jan 1, 2013 Aikens Inc. reported assets of $125,000 and liabilities of $75,000. During the year, assets increased by $44,000 and stockholder’s equity increased by $15,000. How much more did liabilities account for on Dec 31, 2013 than on Jan 1, 2013? o Jan 1 125 = 75 + SE SE= 125-75= $50,000 o Dec 31 169 = L + 65 L= 169-65= $104,000- $75,000= $29,000 o o Preparing a Balance Sheet Assets o Current Assets- cash and other assets (account receivables, short-term investments, inventories, supplies, prepaid expenses, etc.) that are expected to be converted into cash within one year or one operating cycle, whichever is longer o Noncurrent Assets- long-term assets; long-term investments and other deferred charges (property, plant, and equipment, intangible assets, etc.) that will take longer than one year or one operating cycle to convert into cash o Listed in the order of liquidity Liabilities o Current Liabilities- obligations (accounts payable, salaries payable, etc.) that will be satisfied, through the payment of cash or by providing good or services, within one year of the operating cycle, whichever is longer o Long-term Liabilities and Stockholders’ Equity- obligations(notes payable, bonds payable common stock, retained earnings, etc.) of the company that will require payments beyond one year or the operating cycle o Listed in the order of which they will be paid o Jan 22 o Preparing an Income Statement Revenues- money made by the company from sales and interest within a year Expenses- money that is paid by the company, operating and non-operating, within a year Example: o Hightower Inc. reported the following account balances for the year ending Dec 1, 2013. o o REVENUES Sales Rev. $50,600 EXPENSES Cost of Goods Sold $31,300 o Interest Income $1,200 Salaries Expenses $8,800 o TOTAL REV $51,800 Insurance Expense $700 o TOTAL EXP $46,940 Income Tax Expense $2,000 o Net Income= $4,860 Interest Expense $500 o Depreciation $1500 o Rent Expense $2100 Formats: o Single-Step- total rev, total exp, net inc/loss o Multiple-Step- (net sales- cost of goods sold)= gross margin o (gross margin- operating expenses)= income from operations o (income from operations ± non-operating revenues and expenses)= net inc Net Profit Margin= net income/sales revenue= the percentage of profit in each $ of sales o Preparing a Retained Earnings Statement Retained earnings- the income earned by the company but not paid out in the form of dividends Beginning RE Jan 1,2013 ± Net Inc/Loss – Dividends = Ending RE Dec 31, 2013 Ending RE go on the balance sheet under long-term liabilities and stockholder’s equity o Preparing a Statement of Cash Flows List of cash coming in ,through sales and other revenue List of cash uses, paying dividends, etc.
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