Accounting 215 Chapter 1 and 2 Textbook Notes
Accounting 215 Chapter 1 and 2 Textbook Notes
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Pollock 2 ii Retained Earnings amount of earnings profits reinvested into the business not distributed to the stockholders iii All Revenues Expenses because it affects net income Note While this list is thorough it is not exhaustive ts rttre met t reports the revenues less the expenses of the accounting period span of time Aka the profit net income earnings a Revenues amounts expected to be received whether or not the customer has paid for the goods or services b Note Net Income Net Cash generated by operations net cash reported on cash flow statements IIrIII7IIII7j gguit reports the way that net income and the distribution of dividends afected the financial position of the company during the accounting period Note You must complete the Income Statement first to use Net Income Beginning Retained Earnings Net Income Dividends Ending Retained Earnings I 1jIii ImI IImiit ZM main IEII a reports inflows and outflows of cash during the accounting period in the categories of operating investing and financing Cash flows from operating activities CFO Cash flows from investing activities CFI Cash flows from Financinci Activities CFF Change in Cash Beciinninci Cash Balance Ending Cash Balance o Cash flows from Operating Activities cash flows that are directly related to earning income Ex cash paid to suppliersemployees o Cash flows from investing Activities those related to acquisition or sale of company s equipment and investments o Cash flows from Financinci Activities financing the enterprise itself Ex receipt or payment of money to investorscreditors Pollock 3 Relationships Among the Statements o Net Income from the income statement results in an increase in ending retained earnings statement of stockhoder s equity o Ending retained earnings is one of two components of stockhoder s equity from the balance sheet a The change in cash cash flow statement added to the beginning of the year balance in cash equals the end of year balance in cash balance sheet Generally Accepted Accounting Principles GAAP the measurement and disclosure rules used to develop the information in financial statements Congress created the Securities and Exchange Commission SEC however now the Financial Accounting Standards Board FASB has this responsibility The pronouncements are called the Financial Accounting Standards Codification FASC GAAP is of great interest to companies that must prepare financial statements their auditors and the readers of the statement because it ensures quality of those statements important for investors There is a move to adopt International Financial Reporting Standards IFRS i furs issued by the International Accounting Standards Board IASB This would allow easier comparison of companies across borders Types of Businesses igibmhip unincorporated business owned by one person Legally the business and owner are not separate entities taxed at an individual s rate 39 ip unincorporated business owned by partners 2 people a Not legally separate from its owners similar to a sole proprietorship b Each partner is responsible for debts of business unlimited liability a business incorporated under the laws of a particular state a Owners shareholdersstockholders i This means the owners enjoy limited liability b Advantages of corporate form i Limited Liability for stockholders ii Continuity of Life exists even after owners die as compared to a sole proprietorshippartnership iii Ease in transferring ownership buysell stock very easily iv Raise lots of money by selling stocks 4 Misc a Limited Liability Companies LLC sLimited Liability Partnerships LLP s are similar to corporations Accounting Chapter 2 Pollock 4 Primary objective of financial reporting to external users is to provide financial information about the reporting entity that is useful to existing and potential investors lenders and other creditors making decisions Recognition and Measurement Concepts 0 Separate Entity Assumption states that a business s activities are accounted for separately from those of its owners o Continuing Assumption going concern assumption assume that businesses will continue operating into the foreseeable future o Stable Monetary Unit Assumption states that accounting information should be measured and reported in the national monetary unit without any adjustment for changes in purchasing power a Mixed Attribute Measurement Model applied to measuring different assets and liabilities o Historical Cost Principle balance sheet elements are recorded at their cash equivaent value on the date of the transaction 5 fix 7 E3l n x r K 51 G r I r l a re c39 9 G r r ra lt a rare r l W KEV Kquot A 8F F TlQ 3 ti lHll Ql Yl J D 1 Assets probable future economic benefits earned or controlled by an entity as a result of past transactions or events aka the economic resources the entity acquired to use in operating the company in the future a Current Assets assets that will be used or turned into cash within ONE YEAR nventory is always considered a current asset regardless of the time needed to produce and sell it Examples of current assets Cash short term investments accounts receivable b Long Term noncurrent Assets used or turned into cash after the coming year 2 Liabilities probable future sacrifices of economic benefits arising from present obligations of a business as a result of past transactions or events a Creditors entities to which a company owes money b Current Liabilities ones needed to be paidsettled within the coming year c Examples i Accounts payable to suppliers ii Accrued Expenses Payable for wages utilities taxes interest on debt iii Unearned Revenue for unredeemed gift cards that have been purchased iv Notes Payable to banks and other creditors Notes essentially Loans 3 Stockhoder s Eduitv sharehoder s eduitvowner s eduitv residual interest in the assets of the entity after subtracting liabilities a SE is a combination of financing by owners and business operations Pollock 5 i Financing provided by owners Contributed Capital owners invest and receive stock as evidence of ownership ii Financing provided by operations Earned Capital retained earnings profits reinvested into the business Note Assets are ordered in order of liquidity and liabilities are ordered in order of maturity how soon an obligation is to be paid Note Only economic resources and debts resulting from past transactions are recorded on the balance sheet Nature of Business Transactions External Events exchange of assets goods services by one party for assets services or promises to pay liabilities from one or more other parties Internal Events not exchanges between the business and other parties but have a direct and measurable effect on the entity Note Signing a contract is not considered to be an accounting transaction because it involves only the exchange of promises not of assets such as cash goods services or property Transaction Analvsis the process of studying a transaction to determine its economic effect on the fundamental accounting model A L E gt Two Rules 1 Everyone transaction affects at least two accounts Dual Effects see below 2 The accounting equation must remain in balance after each transaction it ALWAYS balances If it doesn t you did something wrong Dual Effects the idea that every transaction has at least two effects on the basic accounting equation A L E Usually receives something and gives up something Note The exchange of two promises to perform does not result in an accounting transaction that is recorded Par Value represents the minimum amount a stockholder must contribute and has no relationship to the market price of the stock Common Stock the account that is equal to the number of shares issued by a corporation times the par value per share par value shares Additional Paid n Capital AKA Paid n Capital Contributed Capital in excess of par the amount of capital contributed by the shareholders less the par value of the stock Pollock 6 o Debit dr left side a Credit cr right side Literally this simple More on it later Compound Entrv an entry that affects more than two accounts or different items within the same account Current Ratio used to measure the ability of the company to pay its short term obligations with short term assets Cgaxi i Current Rosin 3 QUwl L39amplD4 Note a current ratio gt1 is usually good and lt1 is usually bad but NOT ALWAYS A company with good cash management could have less than one Note You must see cash in the transaction for it to affect the statement of cash flows