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What is accounting?

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- consists of three basic activities-- The Keys of Accounting are 1. Identify, Record, Communicate

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To identify:

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1. identifying economic events company selects the events that are relevant to its business ex. Sale of snack chips by pepsico.

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To record:

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records events in order to provide a history of its financial activities. Consists of keeping a systematic, chronological diary of events measured in dollars and cents.

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To Communicate:

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communicates collected information to interested users by means of accounting reports. Most common are financial statements, reported in the aggregate and recorded in a standardized way. Vital element in communicating economic events is the accountant's ability to analyze and interpret the reported information.

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Accounting process includes

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bookkeeping - usually involves only the recording of economic events. Therefore just one part of the accounting process. In total are the entire process: Identifying, recording, and communicating economic events

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Who uses accounting data?

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Internal and external users.

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Internal users are...

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: individuals inside a company who plan, organize, and run the business. TO answer their questions internal users need detailed information on a timely basis. Managerial accounting provides internal reports to help users make decisions. Ex. Financial comparisons of operating alternatives, projections of income from new sales campaigns, and forecasts of cash needs for the next year. ex. usersMarketing managers • Production supervisors, finance directors, and company officers.

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examples of questions asked by internal users:

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1. Finance - Is cash sufficient to pay dividends to Microsoft stockholders? 2. Marketing - What price for an Apple iPod will maximize the company's net income? 3. Human Resources - Can we afford to give general Motors employees pay raises this year? 4. Management- which PepsiCo product line is the most profitable? Should any product lines be eliminated?

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External Users:

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Are individuals and organizations outside a company who want financial information about the company. Two most common types are investors (owners) use accounting info. To make decisions to buy, hold, or sell ownership shares of a company. And creditors (such as suppliers and bankers) use accounting info to evaluate the risks of granting credit or lending money.

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questions of investors:

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- Is General Elec. Earning satisfactory income? Investors - How does Disney compare in size and profitability with Time Warner?

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Questions of creditors:

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- Will United Airlines be able to pay its debts as they come due?

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Financial accounting answers these questions by providing...

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providing economic and financial information for investors, creditors, and other external users.

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Taxing Authorities (IRS)

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Internal Revenue Service want to know whether the company complies with tax laws.

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Relevance

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is of utmost importance to the users of accounting information. If information is not new or has not changed it is irrelevant. It must be precise.

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Why is ethics a fundamental business concept?

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For such standards of reporting financial information to work ethical behavior is a must.

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Explain generally accepted accounting principles? (GAAP)

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*UNIFORMITY

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Who determines these standards?

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(SEC) (FASB) (PCAOB) (IASB)

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Measurement principles:

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Cost principle (Historical) - dictates that companies record assets at their

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Fair Value Principle

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indicates that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability.

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The FASB indicates...

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Only in situations...

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Explain the monetary unit assumption and the economic entity assumption.

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Monetary unit Assumption - include in the records only transaction data that can be expressed in terms of money.

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Economic entity assumption

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should treat business as SEPARATE from themselves. • Proprietorship (personal) • Partnership (two or more persons) • Corporation

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The Basic Accounting Equation:

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HAS THREE MAIN ELEMENTS IN ORDER OF PRIORITY State the accounting equation and list its components.

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what is the basic accounting equation?

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Assets = Liabilities + Stockholders' equity

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Assets =

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Resources the business owns. • Provides future benefit to the company • Cash • Equipment • Land • And inventory

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Liabilities =

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Unpaid DEBT • Ex. Salaries • Until something is paid it is an obligation that must be paid back • Claims owed to other people such as creditors. • Claims against assets (debts and obligations) • Creditors - Party to whom money is owed • Accounts payable, Notes payable

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Stockholders' equity

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1. Common stock 2. Retained earnings • Liability that is owed to the owner of business

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Ownership claim on total assets

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• The owner of the company! • Referred to as residual equity = what is left over • i.e Assets - Liabilities = residual equity

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INCREASES in stockholders equity include:

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• investments by stockholders • Revenues DECREASES to stockholders equity • Dividends to stockholders Expenses

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Therefore:

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A = L + Stockholders equity

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concerning SE, what does revenue cause?

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(+)

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Concerning SE, what does an expense cause?

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(-)

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Concerning SE, what do dividends cause?

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(-)

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Investments made by stockholders

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• do not represent revenues therefore is not included in determining NET INCOME

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• Cash for service =

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Revenue - would go under revenue under stockholders equity under retained earnings.

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• Accounts receivable -

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customer owes company

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• Accounts payable

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• It is possible for the dual effect to happen all on one side

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Analyze the effects of business transactions on the accounting equation.

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• May be external or internal • Not all activities represent transactions • Each transaction has a DUAL EFFECT on accounting equation. • With the goal of keeping the equation BALANCED • Ex. Purchase desk for $100 spending cash to pay of creditors

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sometimes the term owner's equity is used, this refers to...

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one owner( the case with a sole proprietorship)

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Owners' equity refers to

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multiple owners (the case with partnerships)

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stockholders' equity refers to only

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ownership in corporations

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stockholders' equity is equal to

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total assets - total liabilities why? because the assets of business are claimed by ether creditors or stockholders. to find out what belongs to stockholders, we subtract creditors' claims (the liabilities) from the assets. Their remainder is the stockholders' claim on the assets--stockholders' equity. Often referred to as residual equity--that is, the equity "left over" after creditors claims are satisfied. The stockholders' equity section of a corporation's balance sheet generally consists of (1) common stock (2) retained earnings

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a corporation may obtain funds by selling shares of stock to investors.

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common stock is the term used to describe the total amount paid in by stockholders for the shares they purchase

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the retained earnings:

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section of the balance sheet is determined by three items: 1. revenues 2. expenses 3.dividends

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the effect of revenues is positive--

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an increase in stockholders' equity coupled with an increase in assets or a decrease in liabilities

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The effect of expenses

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is negative--a decrease in stockholders' equity coupled with a decrease in assets or an increase in liabilities

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dividends reduce retained earnings

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however, dividends are not an expense

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if campus pizza purchases cheese, sugar, flour etc. on credit these

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obligations are called accounts payable

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if campus pizza borrows money to purchase a delivery truck

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from first national bank, they now have a note payable to the first national bank (liabilities)

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Campus pizza may also have wages payable(liabilities)

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to employees and sales and real estate taxes payable to the local government

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all the aforementioned people mentioned(their liabilities)

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are its creditors, who must be paid before ownership claims. (this is why liabilities come before stockholders' equity (the ownerships claim on total assets)

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the cost principle dictates that companies record their assets at their cost,

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under the cost principle, the company must also use cost in later periods as well.

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a rent expense would be classified as:

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an (E) expense, it decreases stockholders' equity

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Service revenue would be classified as:

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(R) revenue, an increase in stockholders' equity

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Dividends is a distribution to stockholders' equity

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(D), it decreases stockholders' equity

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Salaries expense

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(E), it decreases stockholders' equity

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dividends are distributions of cash or other assets to stockholders

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investments and revenues increase stockholders' equity

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try the exercises BE1-1,BE1-2,BE1-4 etc, also bE1-5,E1-6, E1-7 and

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Do It! 1-2

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transaction analysis:

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Assets = Liabilities + Stockholders' Equity(below) Common Stock + Retained Earnings (below this) Revenues - Expenses - Dividends

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Ex. Transaction 1

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...

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Ex. Transaction 2

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...

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Ex. Transaction 3

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...

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Ex. Transaction 4

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...

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Ex. Transaction 5

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...

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Ex. Transaction 6

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...

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Ex. Transaction 7

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...

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Transaction 8

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...

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Transaction 9

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...

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Transaction 10

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...

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Illustration 1-9 Tabular summary of Softbyte Inc. Transaction

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...

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pg. 20 - 40 do self study practice

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...

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