Acct 2050

Acct 2050Chapter 1: Financial Statements and Business Decisions The Accounting System

The accounting system collects and processes financial information about an organization and reports that information to decision makers. The accounting system provides financial accounting reports which include periodic financial statements and related disclosures to external decision makers. These decision-makers include investors, creditors, suppliers, customers, union representatives, and all other interested parties. The accounting system also provides managerial accounting reports including detailed plans and continuous performance reports. These reports are used by internal decision makers throughout the organization to make decisions about pricing, production, quality, and numerous other day-to-day activities.Business ActivitiesFinancing ActivitiesEx: Borrow money from bankInvesting ActivitiesEx: Purchase equipmentOperating ActivitiesEx: Sell merchandise to customersBusiness activities include: Financing Activities: borrowing or paying back money to lenders and receiving additional funds from stockholders or paying them dividends. Investing Activities: buying or selling items such as plant and equipment. Operating Activities: the day-to-day operations of the business, purchasing materials from suppliers, delivering products and services to customers, collecting cash from customers, and paying suppliers.The Three Basic Financial StatementsBALANCE SHEET reports the amount of assets, liabilities, and stockholders equity of an accounting entity at a point in time.

INCOME STATEMENT reports the revenues less the expenses of the accounting period.

STATEMENT OF CASH FLOWS reports inflows and outflows of cash during the accounting period in the categories of operating, investing, and financing. Companies usually publish four basic financial statements, as follows:BALANCE SHEET reports the amount of assets, liabilities, and stockholders equity of an accounting entity at a point in time.INCOME STATEMENT reports the revenues less the expenses of the accounting period.STATEMENT OF STOCKHOLDERS EQUITY reports the changes in each of the companys stockholders equity accounts, including the change in the retained earnings balance caused by net income and dividends during the reporting period. STATEMENT OF CASH FLOWS reports inflows and outflows of cash during the accounting period in the categories of operating, investing, and financing.

The Accounting EquationA = L + SEAssetsLiabilitiesStockholdersEquityEconomic ResourcesSources of Financing for Economic ResourcesLiabilities: From CreditorsStockholders Equity: From StockholdersThe basic accounting equation shows a companys financial position: the economic resources (assets) that the company owns and the sources of financing for those assets (liabilities and stockholders equity) are always equal. Assets are economic resources of the company that have some future economic benefit. Liabilities are the companys debts or obligations. Stockholders equity indicates the amount of financing provided by owners of the business and earnings of the company since inception that were not distributed as dividends to the shareholders.

Balance SheetAssets (Resources)CurrentCashAccounts ReceivableInventory (to be sold)SuppliesEquipmentBuildingsLandIntangiblesLiabilitiesAccounts PayableAccrued ExpensesNotes PayableTaxes Payable

Stockholders EquityCommon StockRetained EarningsAccounts on the Balance SheetThe purpose of the balance sheet is to report the financial position (assets, liabilities and stockholders equity) of an entity at a particular point in time. Here is a sample list of balance sheet accounts grouped into categories. These categories, also known as elements, are assets, liabilities, and stockholders equity.

Assets are economic resources owned by the company. The exact list of assets depends on the individual company, but this is a representative list. All assets are expected to provide future benefits to the company.

Liabilities are the companys debts or obligations.

Stockholders equity generally consists of two parts. First, Common Stock indicates the amount of financing provided by owners of the business. Next, Retained Earnings is the amount of income that has been earned by the company that has been reinvested in the business rather than being distributed as dividends to shareholders.

In this course we will discuss all of these accounts in detail. Income StatementRevenuesSales Revenue

ExpensesCost of Goods SoldWages ExpenseRent ExpenseInterest ExpenseDepreciation ExpenseAdvertising ExpenseInsurance ExpenseRepair ExpenseIncome Tax ExpenseAccounts on the Income StatementThe income statement reports the revenues less the expenses of the accounting period. Here is a list of the typical account titles on the income statement, grouped into the elements of revenues and expenses.

The first element, or category, is revenues. Companies earn revenues from the sale of goods and services to customers. A few examples of revenues include Sales Revenue, Interest Revenue and Rent Revenue.

Expenses represent the dollar amount of resources used to earn revenues during the period. Examples are Wages Expense, Rent Expense, and Advertising Expense.

When revenues exceed expenses for the period, the company has generated net income. If expenses are greater than revenues in the period, the company has incurred a net loss.

As with the balance sheet accounts, we will discuss each of these revenue and expense accounts as we move through the course.

Cash Flows from Operating Activities Cash Flows from Investing Activities Cash Flows from Financing Activities Statement of cash flowsElements of the Statement of Cash FlowsNote that each of the three cash flow sources can be positive (net cash inflow) or negative (net cash outflow).+-/The statement of cash flows reports inflows and outflows of cash for a stated period of time classified into three categories: operating, investing, and financing activities.

Cash flows from operating activities are cash flows that are directly related to earningincome.

Cash flows from investing activities include those related to the acquisition or sale of the companys plant and equipment and investments.

Cash flows from financing activities are directly related to the financing of the enterprise itself.

Financial Statement SUMMARY

We have learned a great deal about the content of the four basic financial statements. This slide provides a summary by listing each financial statement, its purpose, structure, and examples of content. To ensure the accuracy of the companysfinancial information, management: Maintains a system of controls. Hires external independent auditors. Forms a committee of the board of directors to review these other two safeguards.Ensuring the Accuracy of Financial StatementsPrimary responsibility for the information in the financial statements lies with management, represented by the highest officer of the company and the highest financial officer. Companies take three important steps to assure investors that the companys records are accurate: (1) they maintain a system of controls over both the records and the assets of the company, (2) they hire external independent auditors to audit the fairness of the financial statements, and (3) they form a committee of the board of directors to oversee the integrity of these other two safeguards.

Supplement A: Types of Business EntitiesSole Proprietorship: owned by a single individual. Partnership: owned by two or more individuals.Corporation: ownership represented by shares of stock.Advantages of a Corporation: Limited liabilityContinuity of lifeEase of transfer of ownershipOpportunity to raise large amounts of moneyDisadvantage of a Corporation:Double taxationSupplement A: Types of Business Entities

This textbook emphasizes accounting for profit-making business entities. Supplement A discusses three types of business entities: sole proprietorship, partnership, and corporation. A sole proprietorship is owned by one person; it usually is small in size and is common in the service, retailing, and farming industries. A sole proprietorship is not legally separate from its owner and the owner bears unlimited liability. A partnership is owned by two or more persons known as partners. Similar to a sole proprietorship, a partnership is not legally separate from its owners and each general partner has unlimited liability. In a corporation ownership is represented by shares of stock. The owners are called stockholders or shareholders.

In terms of economic importance, the corporation is the dominant form of business organization in the United States. This dominance is caused by the many advantages of the corporate form: (1) limited liability for the stockholders, (2) continuity of life, (3) ease in transferring ownership (stock), and (4) opportunities to raise large amounts of money by selling shares to a large number of people. The primary disadvantage of a corporation is that its income may be subject to double taxation (income is taxed when it is earned and again when it is distributed to stockholders as dividends).