In bowling, it is often possible to score well in the first game and then bowl poorly in the second game, or vice versa. The following six pairs of numbers give the scores of the first and second games bowled by the same person on six consecutive Tuesday evenings: Game 1: 170 190 200 183 187 178 Game 2: 197 178 150 176 205 153 Assume a bivariate normal distribution, and use these scores to test the hypothesis H0: = 0 against H1: = 0 at = 0.10
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