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Date Created: 10/12/15
Chapter 1 Business Decisions and nancial accounting 08212015 Organizational forms 0 Sole Proprietorship 0 Business organizations owned by one person 0 The owner is personally liable for all debts of the business 0 Partnership 0 Business organization owned by two or more people 0 Each partner is personally liable for all debts of the business Corporation 0 A separate entity from both a legal and accounting perspective 0 Owners of corporations stockholders are not personally responsible for debts of the corporation Organizational forms Corporations 0 Public companies Have their stock bought and sold on stock exchanges 0 Private companies Have their stock bought and sold privately The accounting system 0 Business and nancing activities 0 Accounting system 0 Accounting reports 0 Financial External users Creditors and investors etc Evaluate the company 0 Managerial Internal users managers etc Run the company 0 Accounting is a system of analyzing recording summarizing and reporting the results of a business s activities The basic accounting equation BALANCE SHEET Assets 0 Resources owned by the company Measureable value Expected to provide future bene ts to the company Inventory Cash Equipment PPE PropertyPiantEquipment 0 Accounts Receivable Liabilities 0 Resources owed to the creditors 0 Amounts owed by the business to the creditors 0 Resources owed to creditors 0 Loan note payable 0 Accounts Payable Stockholders equity 0 Resources owed to stockholders 0 Owners claim to the business resources 0 Contributed capital paid by stockholders Stock Company gets capital for selling stock 0 Retained earnings OOOOOO Earned by company 0 Separate entity assumption 0 The nancial reports of a business are assumed to include the results of only that business s activities 0 ALOE ASSETS LIABILITES OWNERS EQUITY Retained Earnings Equation STATEMENT OF RETAINED EARNINGS Revenues Expenses and net income INCOME STATEMENT o Revenues Sales of goods or service to customers Measured at the amount of business charges to the customer Selling price x of units sold 0 Expenses The cost of business necessary to earn revenues Including wages to employees advertising insurance and utilities Any cost related to business net loss Dividends Distributions of a companies earnings to its stockholders as a return on their investment 0 Must have positive retained earnings 0 Must have suf cient cash 0 Not an expense 0 Taken out of retained earnings Stockholders equity Contributed capital 0 Contributed by stockholders o RevenuesExpensesnet income pro t generated 0 Retained Earnings o Earned by company 0 Dividends pro t distributed Financial Statements 0 Income Statement 0 Statement of retained earnings Balance sheet Statement of cash ows Chapter 2 continued 08282015 Steps 2 and 3 record and summarize Most companies use computerized accounting systems which can handle a large number of transactions These systems follow a cycle called the accounting cycle which is repeated dayafterday month aftermonth yearafter year Debit vs Credit 0 DebitDR is equal to left CreditCR is equal to right 0 Write AssetsLiabilitiesStockholders Draw a T under the equation with the center line at the sign 0 Under each of the categories draw a smaller T 0 There should now be 3 Ts under the big T o On the left side of each of the smaller Ts write DR 0 On the right side of each of the smaller Ts write CR Normal Balance 0 What we normally believe an account should be Dependent on how the account increases 0 Typically see Credits for Liabilities and stock holders equity 0 Typically see Debits as assets Journal Entries 0 First show all of your debits O Luca Pacioli Developer of doubleentry accounting 0 According to Pacioli quotDoubleentry accounting is based on a simple concept each party in a business transaction will receive something and give something in return In accounting terms what is received is a debit and what is given as credit The T account is a representation of a scale or balance 0 Scale or balance 0 Receive Debit 0 Give Credit Chapter 1 08242015 External Financial reporting 0 Main goal 0 Provide useful nancial information to external users for decision making 0 Useful if 0 Relevant o Faithful representation 0 Has to be 0 Comparable o Veri able o Timely o Understandable Accounting standards 0 Where United states 0 Who Financial accounting standard board 0 What Generally accepted accounting principals 0 Where World 0 Who IASB o What IFRS international nancial reporting standards The income statement 0 Add up total revenues one by one 0 Add up total expenses one by one 0 Total total 0 Label at the top the amount of time 0 Ex for the month ended September 30th Net income does NOT equal cash Can be called a lot of things Required to show 3 years current year and previous two years The statement of retained earnings Balance sheet AseetsLiabilitiesStockholder s equity Shows what a business owns What it owes What Assets will always agree to the liabilities and stockholders equity The statement of cash ow Summarizes how a business s operating investing and nancing activities caused its cash balance to change over a particular period of time What are the three sections 0 Operating investing nancing activities Operating activities 0 Day to day events that occur when running a business 0 Ex Sales everyday bills lnvesting activities 0 lnvolve making signi cant investments in things like factory equipment 0 Ex purchasing and selling of equipment or land Financing activities 0 Exchanges of money between a business and its lenders or owners 0 Ex borrow money from bank paying money back to bank dividends ln ow is positive Out ow is negative Notes to the nancial statements 0 Notes help nancial statement users understand how the amounts were derived and what other information may affect their decisions Notes to the nancial statements 0 Notes help nancial statement users understand how the amounts were derived and what other information may affect their decisions 0 10 K is an annual report 0 10 Q is a quarterly report Why this order 0 Start with the income statement because you need the net income to put into the statement of retained earnings 0 You need your retained earnings to go into your balance sheet 0 You need your to go into your statement of cash ows 0 You need your ending cash balance to go into the balance sheet Using nancial statements Creditors o Is the company generating enough cash to make payments on sloans Statement of cash ows 0 Does the company have enough assets to cover its liabilities Balance sheet Investors o What is the immediate return through dividends on my contributions Statement of retained earnings 0 What is the long term return through stock price increases resulting from the company s pro ts Income statement Chapter 2 the balance sheet 08262015 The basic accounting equation AssetsLiabilities stockholders equity Study the accounting methods 0 A systematic accounting process is used to capture a report the nancial efforts of a company s transactions Analyze transaction to see how it affects the accounting equation ALSE Record with journal entries l Summarize in general ledger and use TaccountsDCreate nancial Statements 0 A transaction is a business activity that affects the basic accounting equation Duality of effects 0 Every transaction has at least two effects on the basic accounting equation Get and Give ALSE o Assets must be equal liabilities plus stockholders equity for every accounting transaction EXAMPLE Start up Athletic Performance company APC First APC needs cash There are two and only two ways a business can get cash 0 Borrow it liability Get it from Stockholders equity PART A Assets 0 Get 200000 Cash Stockholders equity 0 Gets 200000 of common stock contributed capital PART B Assets 0 Get 100000 of equipment o Gives 100000 of cash 0 Balances because both sides are now 0 PART C Assets 0 Get a building worth 141000 o Gives 41000 in cash 0 Liability 0 Note payable of 100000 o The equation balances PART D operating activity Assets 0 2000 in supplies 0 Liability 0 Accounts payable 2000 PART E 0 APC orders 630 of computers chairs and desks None have been received yet 0 There is no transaction yet so there is no impact on the accounting equann Do not record until you receive but you need to look at terms because it can occasionally depend on the terms Types of Transaction Events Signing an agreement or a contract is not considered a transaction because it typically involves the exchange of only promises not assets liabilities or stockholders equity PART F Assets 0 Cash 2000 H o Liabilities o AlP 2000 H PART G Assets 0 Furniture 630 o Liabilities 0 Accounts payable 630