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 – owned by 1 person, all liabilities/profit/taxes responsible by owner  Partnerships – owned by 2 ppl, all liabilities/profit/taxes responsible by owners  Corporations – corp responsible for liabilities/profit/taxes not owners (owners on responsible for amount they invested) o Public – stock purchase open to public (on stock exchange) o Private – stock purchase not open to public (‘behind closed doors’) 2. Who uses financial statements and why? How are financial statements relevant to users?  Creditors (banks, suppliers) – to evaluate risks in lending $ and to see if you can pay $ back  investors (stockholders) – to see if company is secure and likely to be profitable  customers – to judge the company’s ability to provide service in future  governments – to make sure fallowing rules, pay taxes and other external users. 3. Understand the four basic financial statements and how they relate to each other.  For now, least emphasis on statement of cash flows  Balance sheet – to report company’s financial position at a point in time o How are accounts organized on the balance sheet – assets, liabilities, stockholders equity - Ordered by liquidity, and current (< 1) then non-current (>1) o How are amounts calculated – assets = liabilities + stockholders equity  Income Statement o What is included in an income statement – revenue, expenses, net income o How are amounts calculated – net income = revenue – expenses  Statement of Retained Earnings (links balance sheet and income statement) o What is included in the statement of retained earnings – net income, SE, dividends o How are amounts calculated – Beg RE + net income – div = Ending RE o Dividends – payment by company made to its stockholders as a return on their investment  Statement of Cash Flows – used to know how much $ on hand, how money changes hand o Operating – related to running the business to earn profit, (buying supplies, advertising, renting a building, repairs, insurance coverage) o Investing – involves buying and selling resources w/ long lives ( buildings, land, equipment, tools) and lending to others 1 o Financing – any borrowing from banks, repaying bank loans, receiving contributions from stockholders, or paying dividends to stockholders are considered financing activites. 4. Establishment/regulation of financial reporting.  GAAP (Generally accepted accounting principles) – looks over pub/private corporations, (IASB, International Accountying Standards Board, and FASB, Financial Accounting Standards Board, are considered as a group)  Public Company Accounting Oversight Board (PCAOB) – report whether the financial statements rep what they claim to rep and comply with GAAP  Securities and Exchange Commission (SEC) – supervises work of FASB and PCAOB, looks after public companies only  Sarbanes-Oxley Act of 2002 (SOX) – Enron – a set of laws established to strengthen corporate reporting in US, developed to stop high profile fraud from developing – requires top manager sign on reports certifying responsibilities for fin statements, maintain audit system of internal controls ensuring accuracy, and maintain independent committee to ensure managers cooperate w/ auditors  Independent auditors – check financial statement to protect investors 5. The Accounting Equation – assets = liabilities + stockholders equity 6. Principles, assumptions, concepts…  Separate-entity assumption – separate personal finances from business finances  Conservatism – use least optimistic measures when uncertainty exists about the value of an asset/liability – using this helps to make more accurate business decisions  Cost principle – assets and liabilities should be recorded at original(historical) cost to company  Revenue principle – revenues be recorded when they are earned(company has performed acts promised) not necessarily when cash is received (related to accrual accounting)  Matching Principle – requires that expenses be recorded in the same period as the revenues they generate, not necessarily the period in which cash is paid. Timing of business activity that dictates expenses are recorded/recognized (related to accrual accounting)  Time period assumption – assumes that the long life of a company can be divided into shorter time periods, months, quarters, yrs 7. Transactions – exchange of assets, liabilities, and SE. Any economic change Detect transactions, Examine accounts affected, Classify each account, ID the financial effects, End with effects on basic accounting equation 8. How are transactions recorded and posted?  Debits and credits – Debits: assets +, liability/SE –; Credits: assets –, liability/SE +; debits=credits 2