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Accounting 210 Week 1 notes

by: Christine Luu

Accounting 210 Week 1 notes Accounting 210

Christine Luu

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These notes are for people taking the Introduction to Financial accounting class The notes talks about Financial statements and what they are.
Intro to Financial Accounting
Professor Galvan
Class Notes
Accounting, financial accounting, financial statements
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This 5 page Class Notes was uploaded by Christine Luu on Saturday August 27, 2016. The Class Notes belongs to Accounting 210 at University of Illinois at Chicago taught by Professor Galvan in Fall 2016. Since its upload, it has received 58 views.

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Date Created: 08/27/16
Accounting Notes Chapter 1- Introduction to Financial Statements Forms of Business Organizations Sole Proprietorship - Sole Proprietorship- a business owned by one person -Simple to establish -Owner controlled -Tax advantages Examples: Barber shops, Law offices, Auto repair shops, farms, small retail stores, etc. Partnership - Partnership- a business owned by two or more persons associated as partners -Simple to establish -Shared control -Broader skills and resources -Tax advantages - They are often formed because one individual does not have enough economic resources to initiate or expand the business. Examples: Retail and service-type business, including professional practices (lawyers, architects, etc.) Corporation - Corporations- a business organized as a separate legal entity owned by stockholders. -Easier to transfer ownership -Easier to raise funds - No personal liability Examples: New York Stock Exchange, Coca- Cola, ExxonMobil, General Motors, Citigroup, and Microsoft. Users and Uses of Financial Information Internal Users - Internal Users of accounting information are managers who plan, organize, and run a business. Examples: Marketing managers, production supervisors, finance directions, and company officers. External Users - There are several type of external users of accounting information -Investors (owners)- They use accounting information to make decisions to buy, hold, or sell stock. -For internal users, accounting provides internal reports, such as financial comparisons of operating alternatives, projections of income from new sales campaigns, and forecasts of cash needs for the next year. - Companies present summarized financial information in the form of financial statements. -Creditors- People such as suppliers and bankers use accounting information to evaluate the risks of selling on credit or lending money. -The information needs and questions of other external users vary considerably. Ethics in Financial Reporting - United States regulators and lawmakers were very concerned that the economy would suffer if investors lost confidence in corporate accounting because of unethical financial reporting. - Congress passed the Sarbanes-Oxley Act (SOX) to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals. - As a result of SOX, top management must now certify the accuracy of financial statement. - SOX increased both the independence of the outside auditors who review the accuracy of corporate financial statements and the oversight of boards of directors. - Effective financial reporting depends on sound ethical behavior. Three Principle Types of Business Activity - All businesses are involved in three types of activity–financing, investing, and operating - The accounting information system keeps track of the results of each of the various business activities –financing, investing, and operating. Financing Activities - Came from personal savings, and some likely came from outside sources like banks. - Two primary sources of outside funds for corporations are borrowing money (debt financing) and issuing (selling) shares of stock in exchange for cash (equity financing). Investing Activities - Once the company has raised cash through financing activities, it uses that cash in investing activities. - Investing activities involve the purchase of the resources a company needs in order to operate. A growing company purchases many resources, such as computers, delivery vehicles, furniture, and buildings. - Resources owned by a business are called assets. - Different types of assets are gives different names. Like property, plant and equipment. Operating Activities - Once a business has the assets it needs to get started, it begins operations. Examples of operating activities found on financial statements are - Revenues -Sales Revenue -Service Revenue -Interest Revenue - Supplies - Inventory - Account Receivable - Expenses -Cost of goods sold -Selling Expenses -Marketing Expenses -Administrative Expenses -Interest Expenses -Income Taxes - Accounts Payable - Interest Payable - Wages Payable - Sales Taxes Payable - Property Taxes Payable - Income Taxes Payable The four financial statements Income Statement - Show how successfully your business performed during a period of time, you report its revenues and expenses in an income statement - It reports a company’s revenues and expenses and resulting net incomes or loss for a period of time. To indicate that its income statement reports the result of operations for a specific period of time. - Why are financial statement users interested in net income? -Investors are interested in a company’s past net income because it provides useful information for predicting future net incomes. - Amounts received from issuing stock are not revenues, and amounts paid out as dividends are not expenses. Retained Earnings Statement - To indicate how much of previous income was distributed to you and the other owners of your business in the form of dividends, and how much was retained in the business to allow for future growth, you present a retained earnings statement. - Retained Earnings- is the net income retained in the corporation. - Retained earnings statement- shows the amounts and causes of changes in retained earnings for a specific time period. - The beginning retained earnings amount appears on the first line of the statement. Then the company adds net income and deducts dividends to determine the retained earnings at the end of the period. - If the company has a net loss, it deducts (rather than adds) that amount in the retained earnings statement. - When monitoring the retained earnings statement, financial statement users can evaluate dividend payment practices. Balance Sheet - To present a picture at a point in time of what your business owns (its assets) and what it owes (its liabilities), you prepare a balance sheet. - Balance Sheet- reports assets and claims to assets at a specific point of time. Claims of assets are divided into 2 categories: claims of creditors and claims of owners. - The owners’ claim to assets is called stockholders’ equity. - Equation for the balance sheet (also known as basic accounting equation). Assets = Liabilities + Stockholders’ Equity This relationship is where the name “balance sheet” comes from, Assets must balance with the claims to assets. Statement of Cash Flows - To show where your business obtained cash during a period of time and how that cash was used, you present a statement of cash flow. - The primary purpose of a statement of cash flows is to provide financial information about the cash receipts and cash payments of a business for a specific period of time. - The statement of cash flows reports the cash effects of a company’s operating, investing, and financing activities, - The statement shows the net increase or decrease in cash during the period, and the amount of cash at the end of the period. - Ash yourself these questions:  Where did cash come from during the period?  How was the cash used during the period?  What was the change in the cash balance during the period? Interrelationships of Statements - The retained earnings statement uses the results of the income statement. - The balance sheet and retained statement are also interrelated. - The statement of cash flows relates to information on the balance sheet. The statement of cash flows shows how the cash account changed during the period. Other elements of an annual report Management Discussion and Analysis - The Management discussion and analysis (MD&A) section presents management’s views on the company’s ability to pay near-term obligations, its ability to fund operations and expansions, and its result of operations. Management must highlight favorable or unfavorable trends and identify significant events and uncertainties that affect these three factors. Notes to the Financial Statement - Explanatory notes and supporting schedule accompany every set of financial statements and are an integral part of the statement. - The notes to the financial statements clarify the financial statements and provide additional detail. Information in the notes does not have to be numeric. Auditor’s Report - An Auditor’s report is prepared by an independent outside auditor. It states the auditor’s opinions the fairness of the presentation of the financial position and results. - If the auditor is satisfied that the financial statements provide a fair representation of the company’s financial position and results of operation in accordance with generally accepted accounting principles, then the auditor expresses an unqualified opinion. - If the auditor expresses anything other than an unqualified opinion, then readers should only use the financial statement with caution.


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