ACCTG 215 Notes 1-7
ACCTG 215 Notes 1-7 ACCTG 215
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This 3 page One Day of Notes was uploaded by Shogo Okuda on Tuesday October 28, 2014. The One Day of Notes belongs to ACCTG 215 at University of Washington taught by Wells in Winter2010. Since its upload, it has received 109 views. For similar materials see Introduction to Accounting and Financial Reporting in Accounting at University of Washington.
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Date Created: 10/28/14
ACCTG 215 Notes 17 Corporation entity that is legally separate from owners external funding is raised when individual purchase shares of ownership common stock Assets resources owned by a company Liabilities amounts owed to creditors Stockholders equity owners claims to resources Accounting equation shows that company s resources equal creditors and owners claim to those resources Ex Assets Liabilities amp Stockholders Equity The accounting equation illustrates a fundamental model of business valuation Revenues amounts earned from selling products or services to customers Expenses costs of providing products and services Net income difference between revenues and expenses If expenses exceed revenues the difference between them is a net loss Dividends regular cash payments to its stockholders by the company Forms of Business Organizations Sole proprietorship business owned by a single person Partnership business owned by 2 or more persons Limited liability stockholders are not held personally responsible for the nancial obligations of the corporation ie when the business fails major advantage of corporate form of business BUT disadvantage higher tax burden on the owners double taxation Double taxation taxed twice rst when the company earns it and pays corporate income tax on it and then again when stockholders pay personal income taxes on any amounts the rm distribute to them as dividends Financial statements periodic reports published by the company for the purpose of providing information to external users Income statement statement of Stockholders Equity Balance Sheet Statement of Cash Flows 1 Income statement reports the company s revenues and expenses over an interval of time revenues expenses net income 2 Statement of stockholders equity nancial statement that summarizes the changes in stockholder s equity over an interval of time Common stock represents amounts invested by stockholders Retained earnings represents the cumulative amount of net income earned over the life of the company that has NOT been distributed to stockholders as dividends 3 Balance sheet nancial statement that presents the nancial position of the company on a particular date assetszliabilities amp stockholders equity 4 Statement of cash ows nancial statement that measures activities involving cash receipts and cash payments over an interval of time Operating cash ows include cash receipts and cash payments for transactions involving revenues and expenses Investing cash ows generally include cash transactions for the purchase and sale of investments and productive long term assets resources owned by a company that are thought to provide bene ts for more than 1 year Financing cash ows include cash transactions w lenders such as borrowing money and repaying debt and w stockholders such as issuing stock and paying dividends The Link Among Financial Statements Any transactions that affects the income statement ultimately affects the balance sheet through the balance of retained earnings Other information reported to outsiders Management discussion and analysis MDampA section typically includes management s views on signi cant events trends and uncertainties pertaining to the company s operations and resources Foot note disclosures offer additional information to either explain the information presented in the nancial statements or to provide information not included in the nancial statements Financial accounting information is essential to making good business decisions No other single piece of company information better explains companies stock price performance than does nancial accounting net income Conceptual Framework Conceptual framework theory of accounting FASB s conceptual framework prescribes the correctness of nancial accounting rules Decision usefulness the ability of the information to be useful in decision making Understandability means that users must understand the information win the context of the decision they are making 2 primary decision speci c qualities that make accounting information useful are relevance and faithful representation Relevance accounting information should possess con rmatory value predictive value andor timeliness Faithful Representation accounting information should be veri able neutral and complete Secondary Qualitative Characteristics Comparability ability of users to see similarities and differences between two different business activities ex Dell VS Hewlett Packard Consistency use of similar accounting procedures either over time for the same company or across companies at the same point in time Cost effectiveness suggests that nancial accounting information is provided only when the bene ts of doing so exceed the costs Materiality reflects the impact of nancial accounting information on investors and creditors decisions Underlying Assumptions The economic entity assumption states that we can identify all economic events w a particular economic entity Monetary unit assumption to measure nancial statement elements w need a unit of scale or measurement dollar Periodicity assumption need of periodic information requires that the economic life of an enterprise be divided into arti cial time periods for nancial reporting known as the periodicity assumption quarterly and an annual basis DELL Going concern assumption states that in the absence of information to the contrary a business entity will continue to operate inde nitely Earnings Persistence and Earnings Quality Discontinued operation sale or disposal of a signi cant component of a company s operations Extraordinary item an event that produces a gain or loss must meet two conditions It must be 1 Unusual in nature and 2 Infrequent in occurrence Many managers still prefer to show a loss near the bottom of the income statement as extraordinary rather than placing it higher on the income statement as part of other expenses might Want to report a loss as extraordinary as a Way to signal to investors that it is a one time item and they should exclude it in estimating income for future years Key point When using a company s current earnings to estimate future earnings performance investors normally should exclude discontinued operations and extraordinary items Quality of earnings refers to the ability of reported earnings to reflect the company s true earnings as Well as the usefulness of reported earnings to predict future earnings
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