*Accounting- a systems that collects and processes (analyzes, measures, and records) financial information about an organization and reports that information to decision makers. -Accounting system: Financial Acct Reports (periodic financial statements & related disclosures) Managerial Acct Reports- detailed plans & continuous performance reports Internal decision makers- managers -Four Basic Financial statements: (Statement of financial position)
External decision makers- investors, creditors, suppliers, and customers 4. Statement of Cash Flows 1. Balance Sheet (Assets= Liabilities + Stockholders equity) (Basic accounting equation) -operation-directly relate to earning income -financing provided by owners/ investors= equity 2. Income Income Statement Statement (Revenues(Revenues- Expenses= Expenses=Net Net Income) Income) - investing- acquisition or sale of company’s assets -retained earnings are reinvested in company -aka- statement of earnings, statement of operations/ income -financing- ex: payment to investors/ creditors. (except suppliers) -Net income doesn’t usually= net cash generated by operations 3. Statement of Retained Earnings (Begin RE + Net Income-Dividends= End RE) - end RE is found on balance sheet under SE Relationship b/w sheets:
Notes provide supplimental info abt financial conditons w/ formatting: out which the financial statements cannot be fully undstood. –assets listed by liquidityease of turning into $ 3 types of notes:
-liabilities- maturity (how soon to be paid off) 1. provides description on accounting rules Why is GAAP impt?
2. addi additi tion onal al deta detail ilss abou aboutt a line line on fina financ ncia iall stat statem emen ents ts - effe effect ctss the the sell sellin ing g pric pricee of stoc stock k 3. additional financial disclosures about items not listed. –effects on the amt of bonuses received by mgmt *GAAP- are the measurement rules used to develop the -loss of competitive info to other companies 3 steps of accuracy: information in financial statements. system of controls, external auditors, board of *SEC- U.S gov. agency that determines the financial statements that public companies must provide to auditors. stockholders and the measurement rules that they must use in producing those statements. *FASB- financial accounting standards board is the private sector body given the primary respinsibulity to work out the detailed rules that become GAAP. *Audit- an examination of the financial reports to ensure that they represent what they claim and conform with GAAP Types of business entities:
Price Earnings Ratio:
1. sole propietership- owned by one person 2. partnership- owned by two or more persons known as partners 3. corporation- Owners are shareholders/stockholders. Ownership is respresented by shares of capitol stock.
income overstatement x P/E ratio= overpayment - can determine the value of a company
- primary responsibility of the company’s finicail statements lies within the company’s management *Relevant: info that can influence a decision; it is timely and have predictive value
Objective of External Financial Reporting:
-To provide useful economic information to external users for decision making
* Reliable: info is accurate, unbiased, and verifiable. *Separate entity assumption- business transactions are accounted for separately from the - Relevant, Reliable, Comparable, and Consistent transactions of owners. Elements to Be Measured and Reported: *Unit of measure assumption- acct info should be measured in the nation monetary unit -Assets, Liabilities, Liabilities, SE , Revenues, Expenses, Gains, and Losses * Continuity Assumption- businesses are assumed to continue to operate into the future. Concepts for Measuring and Reporting Information: *Time period assumption- guidance on measuring revenues and expenses. - Assumptions: Separate-entity, Unit-of-meas ure, Continuity, Time Period * Historical cost principle- requires assets to be recorded at the historical cost-cash paid -Principles: Historical Cost, Revenue Recognition, Matching, Full Disclosure + the current $ value of all noncash considerations given on the date of the exchange -Exceptions: Cost-benefit, Materiality, Conservatism, Industry Practices * Materiality- says that small amounts that are not likely to influence a user’s decision can *Current Asset- will be turned into $ within one year be accounted for in the most cost- beneficial manner. *Long-term assets- ex: property, equipment, notes relievable, intangibles * conservatism- says that care should be taken not to overstate liabilities and expenses. internal event such as the use of assets in operations TRANACTION-1. An exchange of assets or services for assets, services, or promises to pay b/w business / 2. A measureable internal *External- exchanges of assets, goods, or services by one party to another Special examples: * Internal – not direc directt excha exchange nges, s, ex: using using up paid paid insur insuranc ance, e, using using buildi buildings ngs and and equipm equipment ent for severa severall years years.. Liabil Liabiliti ities: es: ex: payable, unearned…. *Account- standardized formant that originations use to accumulate the $ effect of transactions on each financial statement item. Assets: ex: receivables, prepaid expenses Qualitative Characteristics of Financial Information:
Principles of Transaction Analysis Assets (A) = Liabilities (L) + Stockholders’ Equity (SE)
Duel Affect: entity both receives something and gives up something in return. 1. Every transaction affects at least two accounts; correctly identifying those accounts and the direction of the effect (whether an increase or a decrease) is critical. 2. The accounting equation must remain in balance after each transaction. ***the exchange of two promises to perform does not result in an accounting transaction
Transactions that occur b/w company and external parties are recorded in general journal in chronological order ; Related accounts are updated in general ledger
Current Ratios:
-helpsTdeter mine if company currently has Table: resources pay to back short term debt ; want it to be b/w1.0-2.0. Over 2 ratio is too high indicating poor use of resources. A # below 1.0 shows sufficient use of liquidity.
Journal Entry:
=current assets/ current liabilities
