Accounting week 1
Accounting week 1 ACC256
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Biol 1305 - 009
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This 3 page Class Notes was uploaded by Haley Morse on Friday September 2, 2016. The Class Notes belongs to ACC256 at Northern Arizona University taught by Dr. Bain in Fall 2016. Since its upload, it has received 45 views. For similar materials see basic accounting in Accounting at Northern Arizona University.
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Date Created: 09/02/16
CHAPTER 1: INTRODUCTION TO FINANCIAL STATEMENTS PURPOSE OF CHAPTER: Accounting plays a vital role in providing financial information to businesses and in personal life Learning Objectives: Identify various forms of business organization and the uses of accounting information 1. Forms of business organization 2. Users and uses of financial information 3. Ethics in financial reporting Explain the 3 principle types of business activity 1. Financing activities 2. Investing Activities 3. Operating Activities Describe the 4 financial statements and how the are prepared 1. Income statements 2. Retained earnings statement 3. Balance Sheet 4. Statement of cash flow 5. Interrelationships of statements 6. Other annual report elements Why do I need to know this? Harold Geneen: former chairman of IT&T said, “To be good at your business, you have to know the numbers-cold” (Chapter 1 page 3). To be in business, you need to know the numbers: income, outcome, what each means, and how to balance them Learning Objective 1: Forms of Business Organization: Sole Proprietorship: A business owned by 1 person. Simple to set up Gives YOU control over the business More favorable tax treatment Liable for debts and legal obligations Examples: barber shops, law offices, auto repair shops, farms, small retail stores Partnership: Join forces with another A business owned by 2 or more people Often formed because 1 individual does not have enough money to start or expand business Different partners have different skills, resources, or perspectives to bring to the partnership Examples: retail and service shops, professional practices (Doctors, lawyers, architects, certified public accountants) Corporation: A business organized as a separate legal entity owned by many stockholders Stocks are easy to buy and sell in shares Easy way for corporations to make money Users and Uses of Financial Information: Financial information provides help for making decisions Accounting: information system that identifies, records, and communicates the economic events of an organization to interested users Users: Users of accounting information can be divided into 2 categories: Internal users and External users Internal Users: managers who plan, organize, and run a business. EX: marketing managers, production supervisors, finance directors, and company officers External Users: Investors trying to figure out whether to invest in the company, buy stock, or sell stock; Creditors trying to evaluate risk of lending money Ethics in Financial Reporting: Sarbanes-Oxley Act (SOX): Passed by Congress to reduce unethical corporate behavior and decrease likelihood of future corporate scandals. Also increases both independence of outside auditors Learning Objective 2: All businesses involve 3 types of activity 1. Financing 2. Investing 3. Operating Financing Activities: 2 primary sources of outside funds for corporations 1. Borrowing money (debt financing) 2. Issuing Shares if stock in exchange for cash (Equity financing) Liabilities: The amount owed to creditors in form of debt or obligations Common Stock: used to describe the total amount paid in by stockholders for the shares they purchase Dividends: Payments corporations make to stockholders on a regular basis Investing Activities: Once a company has raised cash through financing activities, it uses this cash in investing activities, including purchasing what the company needs to operate *”Investing in ourself!” –Dr. Bain’s actual words Assets: resources the company purchases to grow. Example: Delivery trucks, computers, furniture, buildings Cash: One of the most important assets owned by a business. If a business has excess cash, it may choose to invest in securities of other corporations Securities: Stocks or Bonds Investments: another example of an investing activity Operating Activities: Once a business has the assets needed to get started, it begins operations Revenues: The increase in assets or decrease in liabilities from the sale of goods or the performance of services in the normal course of business Supplies: Assets used in day-to-day operations Inventory: Goods available for future sales to customers Expenses: Costs of assets consumes or services used in the process of generating revenue Ex: purchasing needed goods, paying salaries Accounts receivable: Right to receive Money from a customer as a result of a sale Liabilities: Arising from expenses including accounts payable, interest payable, wages payable, sales taxes payable Net Income: Revenues exceed expenses Net Loss: Expenses exceed revenues Learning Objective 3: Financial Statements: 1. Income statements: shows how successfully your business performed during a period of time, showing revenues and expenses 2. Retained earnings statement: indicates how much of your previous income was distributed to you and the other owners of the business in the form of dividends and how much was retained in the business to allow for future growth 3. Balance Sheet: Presents a picture at a specific time of what your business owns (Assets) and what it owes (Liabilities) 4. Statement of cash flows: To show where your business obtained cash during a period of time and how that cash was used Amounts received from issuing stock are not revenues, and amounts paid out as dividends are not expenses! (Quoted directly from Chapter 1 page 12)
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