Objective of Accounting: provide useful information for measuring and reporting a firms earnings (23) Accounting as an Information System:

the 4 Functions of Accounting: (24): 1) Collect: business transactions any exchange of resources, claims (to resources), or obligation (to provide resources) from outside parties 2) Measure: profits in dollars 3) Classify: transactions into Elements of Accounting (26) 1. Assets Resources that represent probably future econ. benefit; things the firm owns (14) 2. Liabilities likely future econ. sacrifices; things the firm owes to creditors (14) 3. Equity the owners share in the company; the owners net interest; A-L=E (14) 4. Revenue inflows from primary activity; sales of firms goods(18) 5. Expense outflows from primary activity; cost of resources consumed to generate profits (18) 1) Direct: directly associated with Revenue (e.g. COGs, commission, shipping) 2) Periodic: Costs that are based on a period of time (e.g. rent, salaries, insurance premiums, interest expense 3) Indirect: other costs required to carry out sales process, but are neither directly sale-related nor periodic (e.g. utilities, travel, advertising, training, supplies, taxes, wages) 6. Gain inflows from adjunct activity; proceeds from disposition of assets (37) 7. Loss outflow from adjunct activity; costs of disposition of assets and unusual events unrelated to business purposes 4) Present: in 3 Financial Statements (13) 1. The Balance Sheet (Statement of Financial Position at a point in time): its Assets, Liabilities, and Equity 2. Income Statement (Statement of Earnings): financial performance over a period of time; its profits; companys inflows and outflows of cash 3. Statement of Cash Flows (SCF): provide inflows (sources and uses) of liquidity For (31): 1) Investors: the firms owners; provide money by buying shares of stocks 2) Creditors: lend money by buying bonds 3) Suppliers Accrual Accounting is Principle-Based (33) 1) Cost business will report amounts based on acquisition costs, rather than fair market value (FMV); this ensures objectivity by eliminating potentially subjective values 2) Realization recognize revenue; business will report revenue only when realized (i.e. when activities related to selling goods are complete and cash collection is reasonably likely) 3) Matching recognize expenses; expense should be matched with revenues. Provides timely connections between sacrifices and rewards to better reflect business profitability 4) Disclosure not all relative info relevant to financial decision-making is quantitative. Some important info is narrative

5) Objectivity reported info should be based on objective evidence. Results of actual transactions with other entities are the preferred basis for objectivity because it lends independence to the evidence 6) Materiality relative size and significance of reportable items determine how it will be reported. (E.g. small transactions are usually aggregated and reported together) 7) Comparability business should apply the same accounting choices and methods yearly; financial reports are common-sized to compare performance (22)