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Market

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is a group of people or entities organize to exchange items of value. 3 parts to a market system for business resources: 1. Consumers: Use resources resources are not in the form consumers want, therefore... 2. Conversion Agents: Transform resources to what consumers want. Ex: Conversion agents might transform trees into furniture that the consumer wants. 3. Resource Owners: Control the distribution of resources to conversion agents. Business are resource owners So.... Resource owners (input)--> Conversion Agents (output)--> Consumers

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Added Value/ Profit

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The difference between the cost of a product and what it is sold for. Ex: If it cost 220,000 for material in order to build the house and has a market value (selling price) of 250,000 the profit/ added value would be 30,000.

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Financial Resources

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Provide the business (conversion agents) with money. 2 Types Investors: Provide money for ownership interest. This means that the business owes the investors a share of the business including a portion of earned income. Creditors: Lend money to businesses. Creditors expect business to repay the money they borrowed with interest.

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Interest

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Specified fee on money borrowed.

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Physical Resources

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Are natural resources. Owners of physical resources want to sell to businesses with high earning potentials because profitable business are able to pay more.

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Labor Resources

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Include both intellectual and physical labor.

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Stakeholders

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-Individuals and organization that needs information about a business are stakeholders. -Users of accounting information to see that the businesses they are planning to invest in or do business with have a high earning potential. -These include: resource providers, financial analyst, brokers, attorneys, government regulators and news reporters etc. -These stakeholders often have a INDIRECT link to conversion agents -This means: a resource provider or analyst may use the information provided to advise a client, government may use accounting information to asses a companies compliance with income tax and federal regulation and reporters may use this information for the news.

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common stock certificate

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contains language that describes the rights and privileges of ownership in a company

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Financial Accounting vs. Managerial accounting vs. Non Profit accounting

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-Financial Accounting: used for EXTERNAL use for people like stakeholders (investors, creditors & brokers) who have an INDIRECT tie to the business. -Managerial Accounting: Used for INTERNAL use for people like (managers, employees and unions) who have a DIRECT tie with the business. - Non Profit Accounting: Used for people like (benefactors/beneficiaries, legislators and the citizens)

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Non-Profit Entities

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Are also called non profit/ non-business organizations that work for no profit such as the soup kitchen.

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What do accounts do?

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Accountants identify, record, analyze and communicate information about the economic events that affect organizations.

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Two types of Accounting

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Public accounting and Private accounting

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Public Accounting

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3 services typically provided to public - audit services: examines a companies accounting records and determines if the financial statements conform to the generally accepted accounting principles. Adds credibility to the company. -tax services: Determines the amount of tax due and tax planning to help minimize companies tax expense. - consulting services: has a wide range of activities like providing computerized accounting systems to companies or to provide personal finance advice. CPA- stands for Certified Public Accountant - normally have to have a college education, pass the CPA exam and obtain work experience.

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Private Accounting

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Private accountants usually work for a specific company or non profit organization. Their task(s) range from: classifying and recording transactions, billing customers and collecting the amounts due, ordering merchandise, paying suppliers, preparing and analyzing financial statements, developing budgets, measuring cost, assessing performance and making decisions.

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FASB

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Financial Accounting Standards Board -privately funded, primary authority for establishing accounting standards in the U.S - measurement rule established by the FASB is the GAAP

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GAAP

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Generally Accepted Accounting Principles - financial statements issued to the public must follow GAAP *companies are not required to follow GAAP for managerial accounting

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Reporting Entities

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The people or businesses accountants report on...accounting records would be provided for each entity. Ex: There's a man named Carl who owns a business and takes out some of his own cash to put into the company. His brother Greg invest in the company giving him ownership interest. Carl then borrows money from First Federal Bank. Carl then pays cash for a building for his business. The company Carl owns receives revenue from customers and he pays his employees cash for salary expenses. There are 7 entities to report on: 1.Carl 2.Carl's company 3.Greg 4.First Federal Bank 5.Commerial Properties (building Carl bought) 6. the customers 7. the employees

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Elements of Financial Statements

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4 types of Financial Statements - Income Statement - Statement of changes in Equity - Balance Sheet - Statement of cash flows 10 elements - Assets - Liability - Equity - Common Stock - Revenue - Expenses - Dividends -Net Income - Gains -Losses

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Net Income

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- also called net earnings and net gain

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Common Stock

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- Investors in a business who receive ownership interest and when the business makes a profit its commitment in what it owes to the investors are described in certificates called common stock. -The commitment btw the investor and business is called stockholders equity - this also makes investors Stockholders in the company -also called contributed capital - On chart, common stock typically falls under cash, common stock and cash flow as a financing activity

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Equity

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-also called stockholder's equity, owner's capital, and partners' equity

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Assets

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- The Resources businesses use to conduct its operations in order to make money - 3 sources of assets: Creditors, Investors & Operations -Assets include: cash, land, buildings, equipment and so forth -Net increases in assets by operations are called earnings or income. -Net losses in assets by operations are called losses -the TRANSFER of assets can also called dividends, distributions or withdrawals -assets are normally shown on the company's books at the amount of their HISTORICAL cost -cash and land are asset accounts

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Dividend

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-wealth transfer from a business to it's owners/investors -paying cash dividends will decrease the left side of the accounting equation and decrease the right sight of the equation.

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double entry book keeping

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All transactions

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Accounts

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Detailed information about the (10) elements are maintained and recorded into accounts.

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liabilities

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A source of assets and an obligation(s) businesses have to pay to its creditors -it is not an expense, simply an obligation to pay back the money. -also called notes payable (money the business promised to pay back to creditors) -

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Retained Earnings

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-all past and present earning minus all past and present dividends -the increase in the business's commitment to it's stockholder *note that earnings that have been retained in the past can be used to pay dividends in the future

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The Accounting Equation

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Assets= Liabilities + Stockholders equity Assets also equal... Assets= Liabilities + Common Stock + Retained Earning

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Accounting Event

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economic occurrence that changes an enterprises assets, liabilities or stockholder equity

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Transaction

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is a particular kind of event that involves transferring something of value between 2 entities. examples include: acquiring assets from owners, borrowing assets from creditors, and purchasing or selling goods.

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double entry book keeping

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all transactions effect the accounting equation in at least 2 places

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Asset Source Transaction

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-an event that causes an increase in asset account and an increase in liability or stockholders equity account -When Stock or Common stock is invested into a business it effects the cash (if it is given by cash) and common stock. -When creditors lend the business money say by cash it would fall under cash and notes payable because borrowing money from creditors is a LIABILITY - can also be viewed as revenue transactions

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Asset Exchange Transaction

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-Businesses trading one asset for another asset -Total assets are unaffected by asset exchange transactions, an asset exchange simply reflects changes in the composition of assets. For example: Trading cash for land, they are both still assets

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Asset Use Transaction

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an event that causes assets and stockholders equity to decrease

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Revenue

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Economic benefits caused by running a business

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Asset Transactions

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increase total assets and total claims

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Expense

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economic sacrifice incurred to generate revenue -decrease in assets, increase in liabilities resulting from operating activities

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Statements of Cash Flow

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3 primary sections reported are: Operating, investing and financing.

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Income statement

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the financial statement that shows all the revenue earned and expenses incurred during that accounting period

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recognition

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means formally REPORTING an economic event or item in the financial statements

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realization

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refers to collecting money, generally from the sale of products or services. ex: Company provides services to customers in 2014 but collects cash from services in 2015; therefore, realization occurs in 2015. under cash basis accounting the company would recognize the revenue when they received it which would be 2015 under accrual accounting the company would recognize the revenue in 2014 when the company performed the services even though it does not collect(realize) the cash until 2015.

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cash basis accounting

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users of cash basis accounting recognize/report revenue and expenses in the in the period in which the cash or revenue is collected.

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accrual accounting

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-recognizing expenses and revenue in the period in which they occur, regardless of when cash is collected or paid. -the term accrual describes a revenue or expense that is RECOGNIZED before CASH IS EXCHANGED - is also accepted by GAAP (generally accepted accounting principles)

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accrued expenses

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-expenses that are recognized before cash is paid, remember that accrual accounting is recognizing expense in the accounting period that they occur. -the entry to recognize the accrued salary expense is called an adjusting entry. The adjusting entry decreases stock holder equity (retained earnings) and increases a liability called salaries payable.

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salaries payable

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the balance in the salaries payable account represents the amount of cash that the company is obligated to pay the instructor in the future. -on the chart it would look like: salaries payable, (retained earnings), expense and (net income) . -when the liability (salaries payable) increases, retained earing will decrease

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deferral

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describes a revenue or expense that is recognized after cash has been exchanged. ex: Company pays cash to purchase supplies in 2014 that it will use in 2015. in this case, cash payment occurs in 2014 although supplies expense is recognized in 2015.

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accounts receivable

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the balance in accounts receivable represents the amount of cash the company plans to collect in the future - on chart, the payment would fall under accounts receivable, retained earnings, revenue and net income and does not affect the cash flow. - when part of the money is paid towards the accounts receivable, it would be an asset exchange, increasing the cash and decreasing the accounts receivable. It now would affect (increase) the cash flow as an operating cost.

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What shows up on the chart when the company makes a payment?

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-When a company pays a salary, purchases advertising or creates a cost, the cost would appear under cash, retained earnings, expense, net income and cash flow with everything decreasing ( ) except for the expense. -When a company makes a payment ahead of time ex: Cato signing contracts for consulting services in 2015 when its 2014, it would not affect the chart AT ALL because the revenue is recognized once the work has been completed not expected to be completed.

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What appears on a balance sheet?

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- assets (cash + accounts receivable) -liability (salaries payable, notes payable) -stockholders equity (common stock + ending retained earnings) assets= liability + stockholders equity *accounting principle the balance sheet reports on a company's financial condition at a specific point in time

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What appears on an income statement?

answer

-revenue - expenses -net income Revenue- expenses = net income

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statement of cash flows

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explains the changes in cash from the beginning to the end of the accounting period

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The closing process

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when the accounting period is over, the (expense, revenue and dividend) accounts are closed and the remaining money is stored into retained earnings for the next accounting period.

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accounting cycle

answer

4 steps 1. record transactions 2. adjust accounts 3.prepare statements 4. close temporary accounts

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matching concept

answer

a primary goal of accrual accounting, to match revenues with expenses. -idea that sacrifices should be paired with benefits

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period cost

answer

expenses that are matched with the period in which they are occurred

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conservatism principle

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when faced with a recognition dilemma, conservatism guides accountants to select the alternative that produces the lowest amount of net income. - its better to understate net income than to overstate it

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product cost

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- aka inventory cost -includes: price of goods purchased, shipping and handling cost, transit insurance and storage cost

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selling and administrative cost

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-cost that are not included in inventory cost -includes: advertising, administrative salaries, sales commission, insurance and interest

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period cost

answer

selling and administrative cost are sometimes called period cost bc they are usually recognized in the period in which they are incurred.

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cost of goods available for sale

answer

-beginning inventory balance + inventory purchased during the period = cost of goods available for sale -cost of goods available for sale falls under: ->merchandise inventory (balance sheet)

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Cost of goods sold

answer

-beginning inventory + purchases - ending inventory= cost of goods sold -is an expense account and stockholders equity account -cost of good available for sale minus ending inventory equals cost of goods sold - appears on income statement

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shrinkage

answer

decrease in merchandising inventory for reasons other than sales to customers -recognizing inventory shrinkage will affect the income statement in that the net income will decrease, expenses will increase and revenue will not be affected.

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FOB shipping point

answer

-means the BUYER is responsible for the freight cost and the freight cost is called transportation-in

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gross margin/ gross profit

answer

the difference between the sales revenue and cost of goods sold

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which of the following financial statements will be affected by a purchase return or allowance?

answer

balance sheet

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cash discounts

answer

ex: 2/10, n/30 this means that the buyer will receive a 2% discount if the payment is made within 10 days, but the total amount due must be paid in 30 days -when cash discounts are applied to purchases they are called purchase discounts

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Purchase returns

answer

- returns of purchased good by customer -will decrease assets and liabilities

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purchase allowance

answer

-dissatisfied customer will keep product with reduction of price given by the seller

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multistep income statements

answer

income statements that show additional relationships

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single step income statements

answer

income statements that display a single comparison of all revenues minus all expenses

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perpetual inventory system

answer

inventory system that recognizes increases in the inventory account when inventory is purchased and decreases in the inventory account when inventory is sold. -when a company uses the perpetual inventory system, pays cash to purchase inventory, the event is classified as an asset exchange

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What is on the statement of cash flows?

answer

-cash receipts from borrowing funds -ending cash balance -cash payments for dividends -net cash flow from investing, operating and financing activities

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what statements appear on stockholders equity?

answer

-total stockholders equity -dividends -beginning common stock -net income -ending retained earnings

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horizontal statements

answer

model that shows how transactions affect the income statement, balance sheet and statement of cash flows

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financing activities

answer

- activities dealing with raising money to start a business paying a dividend to stockholders, issuing common stock, repaying the principle on a loan

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operating activity

answer

paying expenses, paying interest on a loan, selling services to customers

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investing activities

answer

the purchasing and selling of long term assets used in the operation of a business ex: buying or selling land, a building etc

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"For the period ended"

answer

refers to a span of time

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which statement(s) report what happened over a span of time?

answer

-income statement -statement of cash flows -statement of changes in stockholder equity

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IASB

answer

international accounting standards board

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