Chapter 1: Financial Accounting and Accounting Standards

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1

Financial Accounting

Information for people outside of the company

2

Managerial Accounting

Information for internal decision makers

3

FASB

Financial Accounting Standards Board

4

SEC

Securities and Exchange Commission

5

AICPA

American Institute of Certified Public Accountants

6

IMA

Institute of Management Accountants

7

Audit

Examination of company’s financial situation performed by independent accountants

8

Sarbanes-Oaxley Act

criminal offense to falsify financial statements

9

Public Companies Accounting Oversight Board

monitors work of accountants

10

Separate legal entity from the owners (stockholders)

formed under laws of a particular state

11

Continuous life

ownership divided into shares of stock that can be transferred to another

12

No mutual agency

owners can not act as agents of the business

13

Limited liability

stockholders are not responsible for the debts of the corporation.

14

Separation of ownership and management

board of directors appoints officers to manage the business.

15

Corporate taxation

corporation pays franchise tax, federal and state income taxes.

16

Double taxation issue

...

17

advantages and disadvantages of the corporate form of business

...

18

Generally Accepted Accounting Principles

Accounting guidelines that govern how accountants measure, process, and communicate financial information

19

Primary objective of financial accounting

provide information that is useful for making investment and lending decisions

20

Accounting Equation

Assets= Liabilities + Stockholders' Equity

21

Assets

Economic resources, expected to benefit the business in the future

22

Forms of Assets

Cash

Accounts receivable

Merchandise inventory

Furniture

Land

23

Liabilities

economic obligations payable to an individual or organization outside the business

24

Forms of Liabilities

Accounts payable

Notes payable

Salary payable

25

Owners’ Equity (stockholders’ equity)

Owners’ claims to the assets of the business

26

Paid in capital (contributed capital)

amount invested by the owners

27

Retained Earnings

amount earned by the corporation that has not been distributed to the stockholders…amounts retained in the business.

28

Common stock

is the basic ownership of every corporation

29

Net income

Revenue – expenses

30

Dividends

distributions of net income to stockholders

31

Revenues

Amounts earned by delivering goods or services to customers

32

Expenses

Decrease in retained earnings that occurs from using assets or increasing liabilities in the course of delivering goods or services to customers

33

Net Loss

...

34

Examples of Revenues

Sales revenue

Service revenue

Interest revenue

Dividend revenue

35

Examples of Expenses

Salary expense

Rent expense

Utilities expense

Interest expense

36

Transaction

An event that affects the financial position of a particular entity and can be recorded reliably

37

Income Statement

Summary of an entity’s revenues, expenses, and net income or net loss for a specific period

38

Statement of Retained Earnings

Summary of changes in an entity’s retained earnings during a specific period

39

Balance Sheet

Reports the entity’s assets, liabilities, and stockholders’ equity as of a specific date

40

Statement of Cash Flows

Reports cash receipts and cash payments during a period (covered in subsequent chapter)

41

Capital Allocation Process

Financial Reporting

Users (present and Potential)

Capital Allocation

42

Financial Reporting

the financial information a company provides to help users with capital allocation decisions about the company

43

Users (present and potential)

Investors and creditors use financial reports to make their capital allocation decisions

44

Capital Allocation

The process of determining how and at what cost money is allocated among competing interests

45

Entity Perspective

Companies are viewed as separate and distinct from their owners (present shareholders) using this perspective

46

Proprietary perspective

focused only on the needs of shareholders