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Management 1A Chapter 1

by: Daniel Ochs

Management 1A Chapter 1 Management 1A

Daniel Ochs
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Chapter 1 Notes
Principles of Accounting
D.S. Litt
Class Notes
Management, Accounting




Popular in Principles of Accounting

Popular in Business, management

This 5 page Class Notes was uploaded by Daniel Ochs on Monday April 11, 2016. The Class Notes belongs to Management 1A at University of California - Los Angeles taught by D.S. Litt in Spring 2016. Since its upload, it has received 15 views. For similar materials see Principles of Accounting in Business, management at University of California - Los Angeles.


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Date Created: 04/11/16
Monday, April 11, 2016 Management 1A Chapter 1 [Course Reader: Page 1-Page 74] - Accounting: the process of identifying, measuring, and communicating economic events in value terms to provide information for economic decision-making - Accounting is the “language of business” because all organizations set up an accounting information system to communicate data to help people make better decisions - External Users: people not directly involved in running the organization • Shareholders (investors), lenders, directors, customers, suppliers, regulators, lawyers, brokers, and the press - Internal Users: people directly involved in managing and operating an organization • Use information to improve efficiency and effectiveness of an organization - Financial accounting: concerned with providing information for decision-makers primarily outside the firm [External Users] • Page 7 Diagram - Managerial accounting: concerned with providing information for decision-makers inside the firm [Internal Users] • Page 7 Diagram - Financial statements: documents that report an individual’s candor an organizations business in monetary amounts - Bookkeeping: procedural element of accounting - Accounting process: identify, record, and communicate various transactions and events into financial statements - Primary Business Objective: make a profit and remain solvent - Users of Accounting Information • Individuals: manage bank accounts, evaluate job prospects, make investments Business Managers: set goals, evaluate progress, determine corrective actions • 1 Monday, April 11, 2016 • Investors: determine what income they can reasonably expect from their investment • Creditors: determine borrower’s ability to meet scheduled payments on loans • Government Regulatory Agencies (SEC): verify compliance with financial requirements • Taxing Authorities (IRS): collect taxes based on income • Nonprofit Organizations: deal with budges and payroll • Other Users: labor unions, consumer groups, and general public - Accounting Profession / Opportunities in Accounting [Diagram on Page 11] • Auditing: examine financial statements and express opinion on fairness • Taxation: tax advice, planning, prepare tax returns, and represent clients before governmental agencies • Management Consulting: installing accounting systems for companies • Private Accountants: employees of individual companies that work as accountants • Not-for-Profit Accounting: reporting and control for government units - Basic Financial Statements [Page 12] - Annual Report [Page 14] - Management’s Discussion and Analysis (MD&A) [Page 18-19] - Report of Independent Accountants [Page 24-25] - Relative Frequency of Audit Opinions for S&P Companies [Page 26-27] - Balance Sheet Format [Page 28] - The Accounting Equation: Total Assets = Total Liabilities + Owner’s Equity • Assets: economic resources of the firm - Presented in order of liquidity - Assets that typically appear on the Balance Sheet - Valuation of assets 2 Monday, April 11, 2016 • Liabilities: promises or commitments by a business to pay some amount at some future date - Presented in the order that they will come due - Liabilities that typically appear on the Balance Sheet - Valuation of liabilities • Monetary versus non monetary liabilities • Continent versus definite liabilities • Owner’s Equity: owner’s claim on the company’s assets - Contributed Capital: direct investment by the owners - Retained Earnings: indirect investment by the owners (net income or losses less dividends) - Assumptions underlying the financial statements • Going Concern Assumption: business will remain in operation long enough to carry out all its current plans • Consistency: treatment of like transactions in the same way in consecutive periods so that statements will be more comparable • Conservatism & Materiality (qualifying principles) - What makes accounting information useful? • Understandability • Relevance (timeliness, predictive value, feedback value) • Reliability (verifiability, neutrality, representational faithfulness) • Comparability & Consistency - Constraints in setting and implementing accounting principles • Cost-benefit • Materiality • Conservatism - Financial Ratios based on Balance Sheet Accounts [Page 34] 3 Monday, April 11, 2016 • Current ratio = Current Assets / Current Liabilities • Quick Ratio = (Cash + Short-term Investments + Accounts Receivable) / (Current Liabilities) - Quick Assets start with cash and end with the account that precedes inventory • Debt-to-Equity Ratio = Total Liabilities / Stockholders Equity • Debt (Total Liabilities)-to-Total Assets Ratio = Debt / Total Assets • Maker-To-Book Ratio = Market Capitalization / (Total Assets - Total Liabilities) - Market Capitalization is the outstanding shares (x) current market price - Income Statement Format [Page 35] - Net Income Equation: Net Income = Total Revenues - Total Expenses - Financial Ratios based on Income Statements [Page 38] • Start - Statement of Cash Flows Format [Page 39] - Cash Flow Equation: Change in Cash & Cash Equivalents = Cash Flow from Operations + Cash From from Investing Activities + Cash Flow from Financing Activities - Financial Ratios based on Cash Flow Statement [Page 40] • Start - Statement of Stockholders’ Equity [Page 43] Common Stock Outstanding (in shares and $ amount) • • Additional Paid-In Capital • Retained Earnings • Treasury Stock - Retained Earnings Equation: Ending Retained Earnings = Begging Retained Earnings + Net Income (or - Net Income) - Dividends - Financial Statements Example: Starbucks [Page 47-63] - GAAP: Generally Accepted Accounting Principles 4 Monday, April 11, 2016 • Guidelines and rules regarding accounting transactions • Two organizations established accounting principles - Financial Accounting Standards Board (FASB) is a private organization that establishes private guidelines of general applicability and specific accounting rules - Securities and Exchange Commission (SEC) is a government agency that requires companies filing financial reports to follow generally accepted accounting principles - Monetary Unit Assumption • Requires that only transaction data can be expressed in terms of money be included in the accounting records of the economic entity - Economic Entity Assumption • States that economic events can be identified with a particular unit of accountability • Requires activities of the entity be kept separate and distinct form - The activities of its owners and all other economic entities - Business Ownership • 1 Person: Sole proprietorship. Money given back to owner is called a draw. • 2 or more People: Partnership. Money given back to owners is called a draw. - Partnerships are pass-through entity, each partners reports their own share of their partnership’s income or loss as an individual • Each partner has: capital account and a drawing account • Partnership income (or loss) is allocated to each partner according to the terms in the partnership agreement • Business organized as a separate legal entity under state corporation law and having ownership divided into transferable shares of stock is called a corporation. Money given back to the shareholders is called a dividend. 5


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