ACIS 2115: Financial Accounting - Topics 1-4 - Prof. Cintia M. Easterwood, Study notes of Financial Accounting

Download ACIS 2115: Financial Accounting - Topics 1-4 - Prof. Cintia M. Easterwood and more Study notes Financial Accounting in PDF only on Docsity! ACIS 2115 - General Outline of Topics – Chapters 1 through 4 1. Organizational forms  Sole proprietorships o owned by one person o owner is personally liable for all debts of the business o easiest to form  Partnerships o owned by 2 or more people o each partner is personally liable for all debts of the business o more expensive than SP, lawyer to draw up contract o more resources  Corporations o separate entity from both a legal and accounting perspective o owners of corporations are not personally responsible for all debts o expensive to form  Public  have their stock bought and sold on stock exchanges  Private  have their stock bought and sold privately 2. Who uses financial statements and why? How are financial statements relevant to users?  Creditors (anyone to whom money is owed) o banks  Can they pay their debts/loans?  want to keep an eye on how company’s doing  intervene if company looks like it will have trouble repaying loan o suppliers  be sure a business can pay them for the goods/services  ask for financial statement before entering into significant business relationship  Investors o stockholders  Is this a good investment?  evaluate whether the company is secure  Customers o use statements to judge the company’s ability to provide future service on its products and honor warranties  Governments o Tax purpose 3. Understand the four basic financial statements and how they relate to each other.  For now, least emphasis on statement of cash flows  Income Statement o the financial performance of the business during the current accounting period o Revenues-Expenses = Net Income  Revenue  sales of a goods/services to customers  Expense  cost of business necessary to earn revenues o wages to employees o advertising insurance o utilities o NOT DIVIDENDS  Net Income  earnings  can either be left in the company to accumulate (with other retained earnings) or paid out to the company’s stockholders for their own personal use (dividends)  Statement of Retained Earnings o the accumulation of earnings retained in the business during the current accounting period with that or prior records o reports the way that net income and the distribution of dividends affected the financial position of the company o Is part of Stockholder’s Equity o It represents the profits retained in the business o Beginning Retained Earnings + Net Income – Dividends = Final Retained Earnings  Retained Earnings Jan 1, 2005 = $4,023 + NI $548 – Div $14 = RE Dec 31, 05 $4,557  Balance sheet o The financial position of a business at a point in time o Assets = Liabilities + Stockholder’s Equity 1  Assets  any resource controlled by the company that has measurable value and is expected to provide future benefits for the company  cash, supplies for the store, equipment, inventory, receivables, property, prepaid rent, prepaid insurance, certificate of deposit, interest receivable, accumulated depreciation  Liabilities  measureable amounts that the company owes to creditors  payables, unearned revenue  Stockholder’s Equity  owner’s claim to the business  contributed capital (amount directly contributed to business)  retained earnings, stock, depreciation expense, dividends declared, revenue, expenses  Statement of Cash Flows o Inflows (receipts) and outflows (payments) of cash during the current accounting period o +/- Cash flow from operating activities +/- Cash flow from investing activities +/- Cash flow from financing activities ______________________________________ = Change in Cash + Beginning Cash Balance ______________________________________ = Ending Cash Balance o Cash Flows from Operating Activities  Activities directly related to running a business to earn income  buying supplies, renting, repairing, advertising, collected from customers, paid to suppliers, paid for wages, paid for utilities o Cash Flows from Investing Activities  activities that involve buying/selling productive resources with long lives & lending to others  buildings, land, equipment, tools, investments o Cash Flows from Financing Activities  any borrowing from the bank, repaying bank loans, receiving contributions from stockholders, paying dividends to stockholders o Change in Cash  beginning cash balance – ending cash balance 4. Establishment/regulation of financial reporting.  GAAP o Generally Accepted Accounting Principles  helps ensure reliability of financial information  underlying rules for financial reporting  for financial info to be useful, users need to have confidence that info is:  relevant o helps in making decisions  reliable o unbiased & verifiable  comparable o against other companies  consistent o over time  Public Company Accounting Oversight Board (PCAOB) o establishes rules used by auditors  Securities and Exchange Commission (SEC) o government agency that oversees financial reporting by publicly held corporations o gives FASB authority to establish GAAP  Sarbanes-Oxley Act of 2002, independent auditors o laws designed to strengthen corporate reporting o top managers sign a report certifying their responsibilities for the financial statements o maintain an audited system of internal control to ensure accuracy in accounting reports o maintain an independent committee to ensure managers cooperate with auditors 5. The Accounting Equation  Assets = Liabilities + Stockholder’s Equity 6. Principles, assumptions, concepts…  Separate-entity assumption o requires that business’s financial reports include only the activities of the business and not those of its stockholders/owners  Conservatism 2