Survey of Accounting

The Role of Accounting in Business

Chapter 1

Users of Accounting Information Internal users

Managers

External users Investors and creditors Suppliers Customers Employees Government and other regulatory agencies

Types of Accounting Information Financial

External users Follows generally

accepted accounting principles (GAAP)

Supply-driven Highly summarized Basic financial

statements

Managerial Internal users No regulations regarding

what is to be presented or how

Demand-driven Very detailed Various forms of reports

needed to provide useful information to managers

Objectives of Financial Reporting Provide information useful for making

investment, credit and other decisions

Provide information about the amount, timing and probability of future cash flows

Provide information about the entity’s assets and claims against those assets, and the changes in the assets and claims against them

Qualitative Characteristics of Accounting information Primary characteristics

Relevance Reliability

Secondary characteristics Comparability Consistency

Basic Accounting Concepts

Entity concept Information about the entity is kept separate from

information about other entities

Going concern concept It is assumed the entity will continue to operate in

the future unless there is evidence to the contrary

Time period concept The life of the entity is divided into shorter periods

for reporting purposes

Basic Accounting Concepts

Monetary unit concept For accounting purposes, all economic events are

reduced to a common unit of currency

Historical cost concept Economic events will be recorded at their value

when the event occurred

Objectivity concept Accounting information should be based on

objective evidence

Basic Accounting Concepts

Adequate disclosure concept Financial statements, footnotes, and other

information should contain all relevant information needed by users to understand the entity’s financial condition and results of operations

Matching concept Expenses incurred to produce revenue should be

recorded in the same period as the revenue

Basic Financial Statements

Income Statement Reports the results of operations for a period of

time Revenues – expenses = net income (or loss)

Balance Sheet Reports the financial position of the entity at a

point in time Assets = liabilities + equity

Basic Financial Statements

Retained Earnings Statement Reports the change in the amount of earnings

retained within the entity during a period of time

Statement of Cash Flows Reports the sources and uses of cash during a

period of time

Categories of Business Activities Financing Activities

Raising capital to start or expand the business Borrowing and repaying long-term debt Issuance or reacquisition of capital stock Payment of dividends

Investing activities Acquisition of the resources needed to operate

the business Acquisition and disposal of property, plant and

equipment

Categories of Business Activities Operating activities

Day-to-day activities conducted to carry out the purpose of the business Sale of goods or services Incurrence of expenses

Elements of Financial Statements Asset

Probable future economic benefits resulting from past transactions

Liability Probable future sacrifice of economic benefits

resulting from past transactions Equity

Residual ownership in the assets of an entity after the liabilities have been satisfied

Elements of Financial Statements Revenue

Inflow of assets or settlement of liabilities as a result of conducting the main activities of the entity

Expense The consumption of assets or incurrence of

liabilities as a result of conducting the main activities of the entity

Dividend Distribution of assets to the owners of the entity