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Chapter 1

by: Amelia Cassidy
Amelia Cassidy

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About this Document

These notes cover chapter 1, as lectured in class and straight from the textbook
Financial Accounting
Dr. Greenman
Class Notes
business, Accounting, financial accounting
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This 7 page Class Notes was uploaded by Amelia Cassidy on Tuesday March 1, 2016. The Class Notes belongs to BA 210 at Embry-Riddle Aeronautical University - Daytona Beach taught by Dr. Greenman in Spring 2016. Since its upload, it has received 39 views. For similar materials see Financial Accounting in Business at Embry-Riddle Aeronautical University - Daytona Beach.


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Date Created: 03/01/16
Chapter 1 – Accounting in Action  ● What is Accounting?  ○ Three Activities  ■ An info system that identifies, records, and communicates  economic events to interested users  ● Identify ­ events related to business  ● Record ­ systematic, chronological diary of events  ● Communicate ­ accounting reports  ■ Bookkeeping Definition   ● The recording of economic events    ○ Who Uses Accounting Data  ■ Internal Users  ● Managers who plan, organize, run business  ● Managerial Accounting  ○ Provides internal reports to help users make  decisions about companies      ■ External Users  ● Individuals/Organizations outside company who want  financial info  ● Investors (owners)  ○ Make decisions to buy, hold, sell ownership shares of  company  ● Creditors​ (suppliers/bankers)  ○ Evaluate risks of granting credit/lending money  ● Taxing authorities (IRS)  ○ Does company comply w/tax rules  ● Regulatory agencies  ​(SEC/FTC)  ○ Is company operating within prescribed rules  ● Customers  ○ Will company honor warranties/support product lines  ● Labor Unions  ○ Do owners have ability to pay increased  wages/benefits  ● Financial Accounting  ○ Providing economic/financial info to external users      ● The Building Blocks of Accounting  ○ Ethics In Financial Reporting  ■ Sarbanes­Oxley Act (SOX)  ● Passed in 2002 by Congress to reduce unethical corporate  behaviour/decrease likelihood of future corporate scandals  ● Top mgmt has to sign financial reports  ■ Ethics Definition  ● Standards of conduct judged as right/wrong,  honest/dishonest, fair/unfair        ○ Generally Accepted Accounting Principles (GAAP)  ■ GAAP Definition  ● Common standards that indicate how to report economic  events  ■ IFRS​  = International Financial Reporting Standards  ■ FASB  ​= Financial Accounting Standards Boards  ● Private organization that establishes GAAP in the US  ■ SEC​  = Securities and Exchange Commission  ● Agency of US gvmt that oversees US financial  markets/accounting standard­setting bodies  ● Relies on FASB  ■ IASB​  = International Accounting Standards Boards  ■ Convergence  ● Effort to reduce differences between US GAAP and IFRS to  enhance comparability  ○ Measurement Principles  ■ Cost principle (Historical Cost Principle)  ● Companies record assets at their cost  ■ Fair Value principle  ● Assets/Liabilities should be reported at price received to sell  asset/settle liability  ● Can be more useful than Cost Principle for certain  assets/liabilities  ■ Which principle = weigh factual nature of cost figures vs. relevance  of fair value  ■ Relevance  ● Financial information is capable of making a difference in a  decision  ■ Faithful Representation  ● Numbers/Descriptions match what really existed/happened  ○ Assumptions  ■ Monetary Unit Assumption  ● Companies include in the accounting records only  transaction data that can be expressed in terms of money  ● Enables accounting to measure economic events  ● Prevents inclusion of relevant info in accounting records  ■ Economic Entity Assumptions  ● Economic Entity Definition  ○ Any organization or unit in society  ○ Company, governmental unit, municipality, school  district, church  ● Define  ○ Activities of entity be kept separate and distinct from  activities of owner and all other entities  ● Proprietorship  ○ Business owned by one person  ○ Small amount of capital used to start business  ○ Owner receives profits, suffers losses, personally  liable for all business debts  ● Partnership  ○ Business owned by two+ persons  ○ Written/Oral agreement  ○ Partnership transactions must be kept separate from  personal activities of partners  ● Corporation  ○ Ownership is divided into transferrable shares of  stock  ○ Limited Liability  ■ Holders of shares  ■ Not personally liable for the debts of entity  ■ Can transfer all or part of ownership to other  investors at any time  ○ Enjoy unlimited life  ● The Basic Accounting Equation  ○ Assets = Liabilities + Stockholders’ Equity   ■ Assets  ● Resources a business owns  ● Carry out production/sales  ● Capacity to provide future services or benefits  ■ Liabilities  ● Claims against assets (existing debt/obligations)  ● Credit = accounts payable  ● Borrowed money = note payable  ● Employee's = salary/wages payable  ● Local gvmt = sales/real estate taxes payable  ■ Stockholder’s Equity  ● Ownership claim on total assets  ● Residual equity = equity left over after creditor’s claims are  satisfied  ○ Applies to all economic entities  ○ Provides underlying framework for recording/summarizing economic  events  ○ Common Stock  ■ Total amount paid in by stockholders for the shares they purchase  ○ Retained Earnings  ■ Determined by revenues, expenses, dividends  ■ Revenues  ● Gross increases in stockholder’s equity resulting from  business activities entered into for the purpose of earning  income  ● Increase in asset  ● Sales, fees, services, commissions, interest, dividends,  royalties, rent  ■ Expenses  ● Cost of assets consumed/services used in process of  earning revenue  ● Decreases in equity resulting from operating business  ■ Dividends  ● Distribution of cash or other assets to stockholder  ● Reduce retained earnings      ● Using the Accounting Equation  ○ Transactions  ■ Business’s economic events recorded by accountants  ■ External or internal  ■ Money is exchanged  ○ Transaction Analysis      ○ Summary of Transactions  ■ Each transaction must be analyzed in term of effect on:  ● Three components of basic accounting equation  ● Specific kinds of items within each component  ■ Two sides of equation must always be equal  ■ Common Stock/Retained Earnings columns indicate causes of  each change in stockholders’ claim on assets  ● Financial Statements  ○ Income Statement Definition  ■ Presets revenues/expenses/resulting net income/loss for specific  period of time  ■ Statement of operations, earnings statement, profit/loss statement  ■ Net Income  ● Revenues exceed expenses  ■ Net Loss  ● Expenses exceed revenues  ○ Retained Earnings Statement Definition  ■ Summarizes changes in retained earnings for specific period of  time  ○ Balance Sheet Definition  ■ Reports assets, liabilities, equity of company at specific date  ■ Snapshot of company’s financial condition @ specific moment in  time  ○ Statement of Cash Flows Definition  ■ Summarizes info about cash inflows/outflows for specific period  ■ Cash effects of company’s operations during a period  ■ Investing transactions  ■ Financing transactions  ■ Net increase/decrease in cash during period  ■ Cash amount at end of period  ■ Where did cash come from? What was it used for? What was  change in cash balance?  ○ Net income → Retained Earnings → Balance Sheet → Statement of Cash  Flows 


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