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Accounting Ch. 1

by: Sara Chesnos

Accounting Ch. 1 ACBU 2222

Sara Chesnos

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These notes cover class 1 and 2 of Professor Romeo's Class. This goes over basic accounting principles to know for the rest of the semester
Principles of Financial Accounting
Rosa Romero
Class Notes
GAAP, assets, liabilities, Stockholders' Equity, financial accounting, Accounting, Intro to Accounting
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This 40 page Class Notes was uploaded by Sara Chesnos on Friday September 9, 2016. The Class Notes belongs to ACBU 2222 at Fordham University taught by Rosa Romero in Fall 2016. Since its upload, it has received 15 views. For similar materials see Principles of Financial Accounting in Accounting at Fordham University.


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Date Created: 09/09/16
What is Accounting? Illustration 1-1 Three Activities The activities of the accounting process The accounting process includes the bookkeeping function. 1-1 LO 1 Who Uses Accounting Data Internal Users Illustration 1-2 Quesusers askt internal 1-2 LO 2 Who Uses Accounting Data External Users Questions that external users ask 1-3 LO 2 The Building Blocks of Accounting 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. u Recent financial scandals include: Enron, WorldCom, HealthSouth, AIG, and others. u Congress passed Sarbanes-Oxley Act of (SOX). u Effective financial reporting depends on sound ethical behavior. 1-4 LO 3 The Building Blocks of Accounting Ethics In Financial Reporting Steps in analyzing ethics cases and situations 1-5 LO 3 Accounting Firms u Grant Thornton u McGladrey u BDO u Grant Thornton u RSM Tenon u CBIZ / Mayer Hoffman McCan u Smith & Williamson u BDO u Baker Tilly u Crowe Horwath u Moore Stephens u CliftonLarsonAllen 1-6 Generally Accepted Accounting Principles Financial Statements Various users u Balance Sheet need financial u Income Statement u Statement of Stockholders’ Equity information u Statement of Cash Flows u Note Disclosure The accounting profession has attempted to develop a Generally Accepted set of standards that are Accounting generally accepted and Principles (GAAP) universally practiced. 1-7 LO 4 Generally Accepted Accounting Principles Generally Accepted Accounting Principles (GAAP) – Standards that are generally accepted and universally practiced. These standards indicate how to report economic events. Standard-setting bodies: ► Financial Accounting Standards Board (FASB) ► Securities and Exchange Commission (SEC) ► International Accounting Standards Board (IASB) 1-8 LO 4 Generally Accepted Accounting Principles Measurement Principles Historical Cost Principle (or cost principle) dictates that companies record assets at their cost. Fair Value Principle states that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability). Selection of which principle to follow generally relates to trade-offs between relevance and faithful representation. 1-9 LO 4 Generally Accepted Accounting Principles Assumptions Monetary Unit Assumption requires that companies include in the accounting records only transaction data that can be expressed in terms of money. Economic Entity Assumption requires that activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities. u Proprietorship. u Partnership. Forms of Business Ownership u Corporation. 1-10 LO 5 Forms of Business Ownership Proprietorship Partnership Corporation u Generally owned u Owned by two or u Ownership by one person. more persons. divided into u Often small u Often retail and shares of stock service-type service-type u Separate legal businesses businesses entity organized under state u Owner receives u Generally any profits, unlimited corporation law suffers any personal liability u Limited liability losses, and is u Partnership personally liable for all debts. agreement 1-11 LO 5 The Basic Accounting Equation Assets Liabilities Stockholder’s = + Equity Provides the underlying framework for recording and summarizing economic events. Assets must equal the sum of liabilities and stockholders’ equity. Claims of creditors (liabilities) must be paid before ownership claims (stockholders’ equity). 1-12 LO 6 The Basic Accounting Equation Assets Liabilities Stockholder’s = + Equity Assets u Resources a business owns. u Provide future services or benefits. u Cash, Supplies, Equipment, etc. 1-13 LO 6 The Basic Accounting Equation Assets Liabilities Stockholder’s = + Equity Liabilities u Claims against assets (debts and obligations). u Creditors - party to whom money is owed. u Accounts payable, Notes payable, etc. 1-14 LO 6 The Basic Accounting Equation Assets Liabilities Stockholder’s = + Equity Stockholders’ Equity u Ownership claim on total assets. u Referred to as residual equity. u Common stock and retained earnings. 1-15 LO 6 The Basic Accounting Equation Illustration 1-6 Investments by stockholders represent the total amount paid in by stockholders for the shares they purchase. 1-16 LO 6 The Basic Accounting Equation Illustration 1-6 Revenues result from business activities entered into for the purpose of earning income. Common sources of revenue are: sales, fees, services, commissions, interest, dividends, royalties, and rent. 1-17 LO 6 The Basic Accounting Equation Illustration 1-6 Dividends are the distribution of cash or other assets to stockholders. Dividends reduce retained earnings. However, dividends are not an expense. 1-18 LO 6 The Basic Accounting Equation Illustration 1-6 Expenses are the cost of assets consumed or services used in the process of earning revenue. Common expenses are: salaries expense, rent expense, utilities expense, tax expense, etc. 1-19 LO 6 Using the Accounting Equation Transactions are a business’s economic events recorded by accountants. u May be external or internal. u Not all activities represent transactions. u Each transaction has a dual effect on the accounting equation. 1-20 LO 7 Using the Accounting Equation Illustration: Are the following events recorded in the accounting records? Illustration 1-7 Discuss product Purchase Event computer. design with Pay rent. potential customer. Criterion Is the financial position (assets, liabilities, or stockholder’s equity) of the company changed? Record/ Don’t Record 1-21 Advance slide in presentation mode to reveal answers. LO 7 Using the Accounting Equation Illustration 1-8 Expanded accounting equation 1-22 LO 7 Transaction Analysis Transaction (1). Investment by Stockholde Rray and Barbara Neal decides to open a computer programming service which he names Softbyte. On September 1, 2015, they invest $15,000 cash in exchange for common stock. Illustration 1-9 1-23 Advance slide in presentation mode to reveal answers. LO 7 Transaction Analysis Transaction (2). Purchase of Equipment for CaS shftbyte purchases computer equipment for $7,000 cash. Transaction (3). Purchase of Supplies on CreS doitbyte purchases for $1,600 from Acme Supply Company computer paper and other supplies expected to last several months. Transaction (4). Services Provided for CaS sho.tbyte receives $1,200 cash from customers for programming services it has provided. Transaction (5). Purchase of Advertising on Cre Soitt.byte receives a bill for $250 from the Daily News for advertising but postpones payment until a later date. Transaction (6). Services Provided for Cash and CrS edfi.yte provides $3,500 of programming services for customers. The company receives cash of $1,500 from customers, and it bills the balance of $2,000 on account. Transaction (7). Payment of Expense so.ftbyte pays the following expenses in cash for September: store rent $600, salaries and wages of employees $900, and utilities $200. Transaction (8). Payment of Accounts PayaS bolft.byte pays its $250 Daily News bill in cash. Transaction (9). Receipt of Cash on Accou Snof.byte receives $600 in cash from customers who had been billed for services [in Transaction (6)]. Transaction (10). DividendT s.e corporation pays a dividend of $1,300 in cash. 1-24 Financial Statements Companies prepare four financial statements : Retained Statement Income Earnings Balance of Cash Statement Sheet Statement Flows 1-25 LO 8 Net income is needed to determine the Financial Statements ending balance in retained earnings. Financial statements and their interrelationships 1-26 LO 8 The ending balance in retained earnings Financial Statements is needed in preparing the balance sheet. Illustration 1-10 1-27 LO 8 Balance sheet and income statement are Financial Statements needed to prepare statement of cash flows. Illustration 1-10 1-28 LO 8 Financial Statements Income Statement u Reports the profitability of the company’s operations over a specific period of time. u Lists revenues first, followed by expenses. u Shows net income (or net loss). 1-29 LO 8 Financial Statements Retained Earnings Statement u Reports the changes in retained earnings for a specific period of time. u The time period is the same as that covered by the income statement. 1-30 LO 8 Financial Statements Balance Sheet u Reports the assets, liabilities, and stockholders’ equity at a specific date. u Lists assets at the top, followed by liabilities and stockholder’s equity. u Total assets must equal total liabilities and stockholder’s equity. u Is a snapshot of the company’s financial condition at a specific moment in time (usually the month-end or year- end). 1-31 LO 8 Financial Statements Statement of Cash Flows u Information on the cash receipts and payments for a specific period of time. u Answers the following: 1. Where did cash come from? 2. What was cash used for? 3. What was the change in the cash balance? 1-32 LO 8 1-33 LO 8 APPENDIX 1A Accounting Career Opportunities Public Accounting Private Accounting Careers in auditing, taxation, Careers in industry working in and management consulting cost accounting, budgeting, serving the general public. accounting information systems, and taxation. Governmental Accounting Forensic Accounting Careers with the IRS, the FBI, Uses accounting, auditing, and the SEC, and in public investigative skills to conduct colleges and universities. investigations into theft and fraud. 1-34 LO 9 Explain the career opportunities in accounting. Key Points u International standards are referred to as International Financial Reporting Standards (IFRS), developed by the International Accounting Standards Board (IASB). u Much of the world has voted for the standards issued by the IASB. Over 115 countries require or permit use of IFRS. u The fact that there are differences between what is in this textbook (which is based on U.S. standards) and IFRS should not be surprising because the FASBand IASB have responded to different user needs. u Debate about international companies (non-U.S.) adopting SOX-type standards centers on whether the benefits exceed the costs. The concern is that the higher costs of SOX compliance are making the U.S. securities markets less competitive. u The textbook mentions a number of ethics violations, such as Enron, WorldCom, and AIG. These problems have also occurred internationally, for example, at Satyam Computer Services (India), Parmalat (Italy), and Royal Ahold (the Netherlands). 1-35 LO 10 Key Points u IFRS tends to be simpler in its accounting and disclosure requirements; some people say more “principles-based.” GAAP is more detailed; some people say it is more “rules-based.” u U.S. regulators have recently eliminated the need for foreign companies that trade shares in U.S. markets to reconcile their accounting with GAAP. u Because the choice of business organization is influenced by factors such as legal environment, tax rates and regulations, and degree of entrepreneurism, the relative use of each form will vary across countries. u The conceptual framework that underlies IFRS is very similar to that used to develop GAAP. 1-36 LO 10 Key Points u The more substantive definitions, using the IASB definitional structure, are as follows. ► Assets. A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. ► Liabilities. A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. Liabilities may be legally enforceable via a contract or law, but need not be, i.e., they can arise due to normal business practice or customs. ► Equity. A residual interest in the assets of the entity after deducting all its liabilities. ► Income. Increases in economic benefits that result in increases in equity (other than those related to contributions from shareholders). Income includes both revenues (resulting from ordinary activities) and gains. ► Expenses. Decreases in economic benefits that result in decreases in equity (other than those related to distributions to shareholders). Expenses includes losses that are not the result of ordinary activities. 1-37 LO 10 A Look at IFRS IFRS Practice Which of the following is not a reason why a single set of high-quality international accounting standards would be beneficial? a) Mergers and acquisition activity. b) Financial markets. c) Multinational corporations. d) GAAP is widely considered to be a superior reporting system. 1-38 LO 10 A Look at IFRS IFRS Practice The Sarbanes-Oxley Act determines: a) international tax regulations. b) internal control standards as enforced by the IASB. c) internal control standards of U.S. publicly traded companies. d) U.S. tax regulations. 1-39 LO 10 A Look at IFRS IFRS Practice IFRS is considered to be more: a) principles-based and less rules-based than GAAP. b) rules-based and less principles-based than GAAP. c) detailed than GAAP. d) None of the above. 1-40 LO 10


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