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CHAPTER | ~ Introducing Financial Accounting, Accounting is the Language of Business wo =P o os a .* I. Accounting: An Information System: Purpose of Account 1g: To Identify, Measurs, and Communicate information about a company that is useful in ¢ making economic decisions. Resvulk in 4 Financial statements’ \. Balance Sheet? Assets, Liabilities , 4 Equity 2. Income Statement? Revenve & Expenses, 3. Statement of Retained Earnings oe = statement of strodehelder’s Equity 4. Statement of Cosh Flows Il. 2 User Groups: 1. Extemal - Financial pccounsing oe) Truetors Cstvck holders , owners) MW = creditors , Suppliers , Lenders! People wit owe ve money to - Government (ies, sec) ee 2.Intemal - monageriad Accounrina, ast ~ management a.@/ ~ Ceo 2 CFO Business ~ all activities necessary to provide the members ofan economic system with ‘woods and services IIL. Forms of Business Organization + Sole Proprietorship - one owner “Advantage: easy to form Separate entity for accounting purposes (Feonomic Entity Concept) + Nota separate entity for legal purposes or tax purposes + Owner personally responsible for the company’s debts ‘Partnership — two or more owners. Profits and losses are divided among the owners. = Separate entity for accounting purposes = Nota separate entity for legal purposes or tax purposes + Owners personally responsible for the partnership’s debts — unlimited liability ag FP. Corporation — Business incorporated unde the laws of particular state. C7 Corporations must file a charter and bylaws with the state where e eo incorperated. = Owners are called stockholders or shareholders because they own shares of stock inthe company = Separate legal entity from its owners — separate entity for accounting Furposes and tax puroses a + Board of Directors is elected by stockholders to make decisions that affect the company Advantages: 31) Limited liability for owners. Generally, the most owners can Tose is their investment in the company 2) Continuity of life 3) Base in transfer of ownership (stock) 4) Opportunity to raise large amounts of money by selling shares of stock to a large number of people IV. Types of Business Activities ~ 3 types T)Financing Activities- You need 4 2 sources of Funding... acl TOE 1. Borrowing - “eemporary Financing” Crave to ot wo Yoack GALI > Bank Loan = Note Payette a Tor? Credit Pram suppUErs = Account Payab\t 2, Selling Ownership Interest - “permanent Financia,” + ay? : > original Lnvestrunt io urs" carne 7 N)owrars “eon 7081" ae @nvesting Activities - acquice vesources te we ved in xs wnt Cee ee operations 0 per > Resources owned fy or owed to ru Company srok ee as Wi qpnerate FtUrE economic. WuneFit [interest eo i Prod EX: Trventon,, Building, Fomniture a Poneores, 2 owned Equigrmant, Land, Venicle wy Cash, Accounts peceivabU E owed +o @Qperating Activities - imancira, arvesting, wiak your company Rervities does everyday = Balance Swit ‘Revenue = is Ht inflow of assets aS A fy, resvlt of © delivered a product Fe or oe ® performed a quvic€ BEES eppenst = 1s 44 ovtttow (or wa “wing og oF") of a assets 12 nee woe vevenvé ex: Salary, Ge. exe- Ravertieing Ex0- waar "Ee. VUES Exe. -tneviane E¥P- Prepare Wi nancial Statemunts in anis order* V. (4) Financial Statements 1. Income Statement suynmarizs dr vevenues & oy aunas Ciresvis ot operations”) of a companuy for a PERIOD of HL for ending, 23a” eevenve Ceyeenss) oD Ser Draare «FX Of nck Less (AXE) 2. Retained Earnings Statement - sommarius nt Come corned A WA dividends paid over Hu LEE of a bosiniss "Accumulated Earnings’ Beginning Ce wefan XX. por wid : ends, oe) for 2rd “aisrrinstion of cs HY 12130) 12. earning ect ; tammatcrcmensh Shows #ne finandal ean company ata POINT in Lime ere & The seco ring eat : Stakemert of firenciat prsition” pssets = Liabilities +] stockholders’ Equity (wrak co. owns) (what co. owes) Cowners Nitevest) Balance Sheet peered. pssets Wabi corer. earnings cosh Lad accounts coors Puget XK Je) accounts tecavants X¥ el) Notes “ “Evento me v eens x Comerin tok XY, Build wy Mu XY = getained Eornit Land —aor Hsing farins a OS. ofCalPiee. Total Uab, 4 Total SAE 8X shows Knx qporces A uss of cash ities joking, activi FF eietingy menvines FL. Pivonding, activities Example Problem: ‘The following information is available from the records of Aggie Landscape Design Inc. at the end of the 2012 calendar year: Accounts Payable $6,000 Accounts receivable 4,500 Common stock 4,000 Casi 13,000 Dividends 1,000 Landscaping Revenues 29,000 Insurance Expense 2,000 Required: Office Equipment $ 8,500 Rent expense 6,500 Retained earnings, Beginning of year 9,000 Salary Expense 12,000 Supplies 500 1. What was Aggie’s Net Income for the year ended Dec 31, 2012? 2. What is Aggie’s Retained Earnings balance at the end of the year? 3. Prepare Aggie’s Balance Sheet as of December 31, 2012. VI. Assumptions & Principles of Financial Reporting A. Assumptions - 1, Monetary Unit Assumption — Only transactions that can be expressed in terms of money can be included in the accounting records. > use US & +0 record assume nak Wu & is relativdy stable 2. Economic Entity Assumption ~ Activities of the business are separate from activities of the owners. 3. Time Period Assumption ~ The long life of a company can be reported over a series of shorter time periods. Makes it possible to prepare the Income Statement for a specific time period. 4, Going Concer Assumption ~ The company will not g0 out of business in the near future. Not liquidating. B. Principles - 1. Historical Cost Principle ~ Record assets at the cost paid to acquire them Ex: Lond cock £50,000 Z Ho not a Now worn £15,000 > on walance 1. Leave 2. Full Disclosure Principle ~ Provide all information at Co¥t sufficiently important to influence a decision. Include in footnotes C. GAAP (Generally Accepted Accounting Principles) Rules and assumptions under which financial ot statements must be prepared (im ne USA) oe D. Who sets Accounting Standards? Is a joint effort 1, SEC (Securities and Exchange Commission) - ultimate authority (enforcer) 2MEASB (Financial Accounting Standards Board) ~ sets accounting standards in the U.S. 3. AICPA (American Institute of Certified Public Accountants) ~ advises FASB. Professional organization for CPA's. 4, PCAOB (Public Company Accounting Oversight Board) — sets audit standards 5. IASB (Intemational Accounting Standards Board) in 2001. Develops worldwide accounting standard (IFRS -) (International Financial Reporting Standards) ‘A. US adoption y B. Many countries currently using ear! Problem 1-6 Green Bay Corporation began business in July 2012 as a commercial fishing operation and passenger service between islands. Shares of stock were issued to the owners in exchange for cash. Boats were purchased by making a down payment in cash and signing ‘note payable forthe balance. Fish ae sold to local restaurants on open account, and customers are given 15 days to pay their account. Cash fares ae collected for all passenger traffiz. Rent for the dock facilities is pad at the beginning ofeach month Salaries and wages are paid atthe end ofthe month. The following amounts are from the records of Green Bay Corporation at the end ofits first month of operations: Accounts Receivable 818,500 Boats 80,000. ‘Common Stock 40,000 Cash 7730 Dividends 5,400 Fishing Revenue 21,300 ‘Notes Payable 0,000 Passenger Service Revenue 12,560 Rent Expense 4000 Retained Earnings ad Salary and wage expense 18,230 1 Prepare an income stetement for the month ended July 31, 2012 2. Prepare ahalance sheet at Iuly 1, 2017 ‘Accounting information should be ‘© Relevant: information that is useful to the decision maker, has the ability to make a difference to the decision maker ‘+ Faithful Representation: free from error, not biased Decision Makers need to: ‘© Beaware of ethical conflicts Ask questions, do research ‘© Be aware of pressures to make choices that are not inthe company's or owners ‘est interest Ethics and Accounting: A Decision Model Recognize an ethical dilemma Analyze the key elements/principal stakeholders ‘+ Determine sltemative methods to report the transaction, situation, or event ‘© Select the best or most ethical solution Sarbanes-Osley (SOX) det In response to financial reporting seandals uncovered in 2001 and2002 (such as Enron, ‘Tyeo, Worldcom, and Athur Anderson) the United States Congress passed a new law — the Sarbanes-Oxley (SOX) Act of 2002 —to address the problems with financial reporting, All publicly traded companies and any international companies that srade of the U.S, stock exchanges must comply with this aw. ‘The bill was sponsored by Senator Paul Sarbanes of Maryland and Congressman Michael Oxley of Ohio. Key Provisions ofthe Sarbanes-Oxley Act of 2002: Management Mansgement must qsss8. and report on the efstiveness of the sampanys interal contol structure and procedures over financial reporting. (Se. 404) 2, ‘New rus require a code ofethies be established and reported 3. New penalties exis for management ifthe financial statements are inaccurate or incomplete (includes both fines and imprisonment). SOX requires the CEO and. the CFG to certify the annual financial 4 “Far nt Ser aca cae pace of sie ett in the company (whistle-blower protection). Board of Directors PI. SOX seeks'o strengthen the Board by implementing new rules for the compos tion ofthe Board of Directors, requiring some directors tobe independent management, —> 2, ROK TonIrS Hit commie members (made up of members of the Board of Directors) be independent of management. ‘The External Auditors 1, New ruks for auditors include stronger rules regarding auditor independence, (Audit firms ean no longer provide: manage Geeag eee consulting services 1 its audit clients.) 2. Auditor report othe cients audit committee rather than tothe client's ianagenent team, Enforcement “The new Public Company Accounting Oversight Board (PCAOB) has the power to regule auditing fms 2. Al'acgcunting firms that audit publicly traded companies must resister with the CAO and fiw is ugg sateen ‘Sample financial statements: ABC Company Balance Sheet (OM December 31,2012 Ccrent Ase ash 52950 ‘Accounts Receivable 76080 Inventor 62150 ‘Otice Sipps “80 Prepaid surance 2650 "Toa Carent Aces Property, ln, nd Equipment: and 20,000 Buiging 22,100 Equipment 15570 ‘Lest Accumulated Deprecistion aas20 rope, Plan, and Equip, net "97250 Patent 5.000 Total Assets ibis current Lthiies ‘Account Payable 22420 Note Pyable(shor-teon) 000 Salaries Payable 2140 ‘Uneamed Revenue 300 “otal Curent Libis Longer Lables: ‘Note Pale (long-erm) 5.000 Bonds Piyable 12,000 otal Labs Stacholder’ Ei, Common tock 25,000 Retained Eamings iti200% Total Labi nd ‘Stocholsrr Equity siv4310 szsssca V 30360 20.000 $50,360 136.200 szassca 7 ABC Company Income Satement Forthe Year Ended December 31,2012 Sales Revenue 708255 Cot of Goods Sid 525305 (Gross Profit sis2.980 Less Operating Expenses: Salary Expense 13,028 Advertsing Expense 17300 Insurance Expense 3300 Ren Expense 13335 Depreciation Expense 320 ‘Amonization Expense ‘0 sz2s80 Net Income s ABC Company Retsned Earnings Statement Forte Year Ending December 31,2012 Retained Esmings, any 1, 2012 81283800 ‘Net Income forthe year noo Less Dividends 13,000 22400 Retained Esmings, December 31,2012 si7i00 ie

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