ACC 100 Chapter Notes - Chapter 2: Accounting, Accounting Equation, Financial Statement

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24 Feb 2021

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How is profit calculated: what is the interrelationship between financial reporting elements, revenue - expenses = profit, profit also called net income or net earnings. Both parties need financial information to meet their objectives. Revenues - expenses = profit: what the business earns (revenues) less the costs used, consumed, or incurred to earn that revenue (expenses) determines a business"s profit. Retained earnings = profit - dividends: retained earnings is part of equity. How do assets and liabilities tie into equity: equity is equal to the wealth that is owed to the owners of the business by the business. It says that only the activities of a business are included in the business"s financial information. Assets - liabilities = equity: remember - equity is the wealth that the business owes to the owners. Note that, because this is a mathematical equation, we can switch it around to its more common format:

Related Questions

Question 1

Identify the item below that is not one of the four different types of data processing activities.

		deleting
		reading
		creating
		using

Question 2

All of the following are advantages of an ERP system except

		ERPs permit manufacturing plants to receive new orders in real time.
		in an ERP, data input is captured or keyed once.
		it takes considerable experience and training to use an ERP system effectively.
		ERPs permit management to gain greater visibility into every area of the enterprise.

Question 3

Sam Jones has been the controller of Downtown Tires for 25 years. Ownership of the firm recently changed hands and the new owners are conducting an audit of the financial records. The audit has been unable to reproduce financial reports that were prepared by Sam. While there is no evidence of wrongdoing, the auditors are concerned that the discrepancies might contribute to poor decisions. Which of the following characteristics of useful information is absent in the situation described above?

		relevant
		reliable
		complete
		timely
		understandable
		verifiable
		accessible

Question 4

An ERP system might facilitate the purchase of direct materials by all of the following except

		preparing a purchase order when inventory falls to reorder point.
		routing a purchase order to a purchasing agent for approval.
		communicating a purchase order to a supplier.
		selecting the best supplier by comparing bids.

Question 5

Antia Carmie is the largest collector and retailer of Japanese fans in the St. Louis area. Antia uses computer technology to provide superior customer service. The store's database system was designed to make detailed information about each Japanese fan easily accessible to her customers. Accordingly, the fan price and condition are provided for each fan, along with many pictures of each fan. In Antia's database, the price of the Japanese fans is a(n)

		entity.
		attribute.
		field.
		record.

Question 6

Which of the following is not considered a source document?

		A copy of the company's shipping document.
		A copy of the company's ledger.
		A copy of the company's sales journal.
		A copy of the company's financial statements.

Question 7

In an ERP system, the module used to record data about transactions in the disbursement cycle is called

		financial.
		order to cash.
		customer relationship management.
		purchase to pay.

Question 8

Baggins Incorporated identifies new product development and product improvement as the top corporate goals. An employee developed an innovation that will correct a shortcoming in one of the company's products. Although Baggins current Return on Investment (ROI) is 12%, the product innovation is expected to generate ROI of only 10%. As a result, awarding bonuses to employees based on ROI resulted in

		goal conflict.
		information overload.
		decreased value of information.
		goal congruence.

Question 9

________ are examples of activities that constitute inbound logistics.

		Activities that transform inputs into final products or services
		Activities that provide post-sale support to customers
		Activities that consist of receiving, storing, and distributing the materials used as inputs by the organization to create goods and/or services it sells
		Activities that help customers to buy the organization's products or services

Question 10

In which transaction cycle would information for inventory purchases be most likely to pass between internal and external accounting information systems?

		the revenue cycle
		the expenditure cycle
		the human resources / payroll cycle
		the financing cycle

Question 11

The collection of customer payment is part of which transaction cycle?

		the human resources cycle
		the production cycle
		the revenue cycle
		the expenditure cycle

Question 12

Which of the following is an example of source data automation?

		POS (point-of-sale) scanners in retail stores
		a bill of lading
		a subsidiary ledger
		a utility bill

Question 13

All of the following are guidelines for developing a good coding system except

		be as sophisticated as possible to promote usage.
		be consistent with its intended use.
		be flexible to allow for growth.
		be consistent with the company's organization structure.

Question 14

What is a key decision that needs to be made with regards to borrowing money from lenders?

		the location
		pro forma income statement
		how much capital to acquire
		job descriptions

Question 15

Identify the false statement below.

		A service company does not have an inventory system.
		Retail stores do not have a production cycle.
		Financial institutions have installment-loan cycles.
		Every organization should implement every transaction cycle module.

Question 16

The chart of accounts of a fast-food restaurant would probably include

		a list of customers.
		a list of financial statement accounts.
		a list of vendors.
		a list of employees.

Question 17

Which statement below regarding the AIS is false?

		Traditionally, most AIS have been designed so that both financial and operational data are stored in a manner that facilitates their integration in reports.
		The AIS must be able to provide managers with detailed and operational information about the organization's performance.
		Both traditional financial measures and operational data are required for proper and complete evaluation of performance.
		The AIS was often just one of the information systems used by an organization to collect and process financial and nonfinancial data.

Question 18

In Petaluma, California, electric power is provided to consumers by Pacific Power. Each month Pacific Power mails bills to 186,000 households and then processes payments as they are received. What is the best way for this business to ensure that payment data entry is efficient and accurate?

		well-designed paper forms
		turnaround documents
		source data automation
		sequentially numbered bills

Question 19

Data must be converted into information to be considered useful and meaningful for decision making. There are seven characteristics that make information both useful and meaningful. If the same information can be reproduced by two independent and knowledgeable people, it is representative of the characteristic of

		verifiability.
		truthful.
		relevance.
		reliability.

Question 20

		entity.
		attribute.
		field.
		record.

lilaccod491

This is for AC1420: Week 2 trial balance (ITT Tech) not sureexactly where to start if someone can help

Based on the lesson presentation and readings for this week,prepare a one- to two-page document listing a minimum of fiveadjusting entries to a trial balance, explaining the purpose ofeach of these entries.
Make sure you include both the debit and credit entry for eachadjusting entry. Specify in your response whether these entrieswill increase or decrease the profits in the current period.

Accounting Information Systems
Throughout the chapters of this book, you have been keeping trackof Team Shirtsâ transactions using an accounting equation worksheet. We can do that in a simple world with a small number oftransactions. In the real world, that wouldnât work very well. Acompany in the real world needs a better system to keep track ofthe large number of transactions represented in the four basicfinancial statements. A company may have an accounting system thatgathers only accounting informationâjust recording the informationthat applies to the financial statementsâand other informationsystems gathering information for marketing, production, and otherparts of the company. Alternatively, a company may have a single,integrated information system in which all company information isrecordedâdata about suppliers, employees, operations; and theaccounting information is simply a small part.
The firmâs accounting information is kept in the firmâs generalledger. The general ledger is the collection of a companyâsaccounts where the amounts from the firmâs transactions areorganized and stored. You can think of it as a big book with a pagefor every asset, liability, equity, revenue, and expense account.Later in this appendix, you will learn how transactions getrecorded in a companyâs general ledger. For years, the generalledger system was maintained by the accounting department as aseparate information system; and the other functional areas of thebusinessâmarketing, production, sales, etc.âeach had its own systemfor keeping track of the information it needed. Since thedevelopment of computers and software programs that can managelarge amounts of information, more and more companies are using asingle, integrated information system. Thus, instead of keepingtheir data separately, accountants may get rprise-wide resourceplanning system (ERP).
No matter how it is related to the rest of a firmâs informationsystem, the accounting system is still called the general ledgersystem. The same financial statements are produced with both thegeneral ledger and the integrated types of information systems. Inthis appendix, we will use the general ledger system, which wasdesigned as a manual system, to demonstrate how transactions arerecorded, classified, and summarized for the financialstatements.
The General Ledger Accounting System
Keeping track of financial information with a traditionalrecord-keeping system is often called bookkeeping. As transactionsoccur, they are recorded chronologically by a bookkeeper in a bookcalled a journal. When we prepare an accounting equation work sheetshowing the effect of each transaction on the accounting equation,we are doing something similar to recording a transac- tion in ajournal. The resources exchanged are shown with their dollaramounts. The journal con- tains a record of each transaction as itoccurs. An example is shown in Exhibit B.1. In the next section,youâll learn how the âdebitsâ and âcreditsâ columns are used. Fornow, just notice that all of the accounts affected by thetransaction are used in a journal entry. Most companies use morethan one journal; each department may have its own journal. Commonjournals are the (1) sales journal, (2) cash receipts journal, and(3) cash disbursements journal. For simplicity, weâll use a single,general journal for all our transactions.

ge 4: General Journal
Ref.
J-1
J-2
Date Journal entry Debits Credits
June 1 Cash . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 65,000 Sales . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 65,000
To record the collection of cash for sales. June 4 Equipment . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . 20,600
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . 20,600 To record the purchase of equipment for cash.
The journal entries are recorded chronologically. Then, theindividual items are âregroupedâ by account as they are posted tothe general ledger. Trace the cash amounts in the journal entriesto the general ledger cash account shown in Exhibit B.2 on page566. The amounts for sales and equipment will be posted to theirown general ledger accounts

Because a company may have hundreds or even thousands oftransactions during an account- ing period, it would be difficult,probably impossible, to try to gather and use the information froma chronological record such as the journal. To be useful, theinformation needs to be reorganized, grouping together transactionsthat involve the same account. For example, when all the transac-tions that involve cash are grouped together, then the companyâscash balance can be easily deter- mined. As you can see from thatexample, it is useful for similar transactions to be groupedtogether. The transactions from the journal or journals aretransferred to another book called the general ledger through aprocess called posting the transactions to the general ledger.Posting is done periodically; it could be daily, weekly, ormonthly, depending on the size of the company.
The general ledger is the primary record of the financialinformation of the business. It is organized by accounts. As youread earlier in this book, an account is the basic classificationunit of accounting information. You can think of each financialstatement item as an account, and each account as a page in thegeneral ledger. On the page for a particular account, we record allthe additions to, and deductions from, that account.
For example, one account in the general ledger is cash. On the cashpage in the general ledger, we find every cash collection and everycash disbursement made by the company. If there are moredisbursements or collections than can fit on one page, they will berecorded on as many following pages as needed, all comprising thecash account. To make it easy to find the amount of cash on hand,the cash account has a running balance. That means a new balance iscalculated after every entry. Think about your own checkbookâthatâsthe record you keep of each check you write (a subtraction); eachdeposit you make (an addition); and the resulting total remainingin your checking account (thatâs your running balance). If you keepa running balance, it is much faster to find out how much cash youhave in your account. (Have you discovered what happens when youfail to keep your checkbook balance current?)
Accounts in the general ledger include cash, accounts receivable,inventory, prepaid insurance, equipment, accumulated depreciation,accounts payable, notes payable, contributed capital, and retainedearnings. (Notice, these are given in the order in which theyappear on the balance sheet.) How many accounts does a companyhave? Every company is different, and the number of accountsdepends on the detail the company wants in its financial records.For example, one company could have an account called utilitiesexpenses in which many different utility-related expenses could beaccumulated. Another company might prefer to have a separateaccount for each type of utility expenseâa separate page in thegeneral ledger for electricity expense, gas expense, water expense,etc. The number of accounts is determined by the amount of detail acompany wants to be able to retrieve from its records. If a companyuses very little gas or water, it would be a waste of time andspace to keep a separate account for those expenses. A company thatuses water in its production process, on the other hand, woulddefinitely want to keep a separate account for waterpurchases.
Companies also have subsidiary ledgers. These are detailed recordsthat support the bal- ances in the general ledger. For example, theaccounts receivable subsidiary ledger will have details about thecredit customersâsales, receipts, and account balances for everycustomer. The total dollar amount of accounts receivable in theaccounts receivable subsidiary ledger will be the total in thegeneral ledger.
Most companies have a large number of accounts, and they combinethe similar ones for the financial statements. When we look at thefinancial statements, we canât really tell how many individualaccounts a company has in its general ledger. Many smaller accountsmay be com- bined for financial statement presentation.
Anyone in the firm with access to the accounting records who wantsto know the balance in any account at any time can find it bylooking in the general ledger. A list of the balances in all theaccounts of a company is called a trial balance.
Before the financial statements can be prepared, adjustments to therecords must be made. We discussed those adjustments and how tomake them in Chapter 3. Adjustments are needed because of thenature of accrual accounting. On the financial statements, we needto include revenues that have been earned and expenses that havebeen incurred, even if we have not yet received the cash earned orpaid the cash for the expenses incurred during the accountingperiod. These adjustments are called accruals. The action has takenplace, but the dollars have not been exchanged.
We also need to be sure to include on the income statement for theperiod any revenue weâve earned or expenses weâve incurred forwhich the dollars were exchanged at a previous time. These arecalled deferrals. The dollars were already exchanged, and werecorded the receipt of the cash when we received the cash.However, we did not recognize any revenue or expense at that time.At the end of the accounting period, we have to recognize anyrevenue we have earned and any expenses that weâve incurred.
No matter what kind of accounting system a company uses, theinformation produced by that system must be adjusted before thefinancial statements can be prepared. After the adjustments aremade, the financial statements are prepared. We have actually doneall thisârecording the transac- tions, making the adjustments, andpreparing the financial statementsâusing the accounting equationwork sheet. The general ledger system is simply a more feasible wayto do it in an actual business.
Debits and Credits
To use the general ledger system and to understand the informationit makes available, we must learn a bit more accounting language.Donât panic over the terms debit and credit. You will find themeasy to understand, but only if first you get rid of any notions ofwhat you already think debit and credit mean. In accounting, eachterm has a very specific meaning that should not be confused withits more general meaning.
In accounting, when we say debit, we mean the left side; when wesay credit, we mean the right side. (This should be easy toremember.) Left is the only thing that the word debit means andright is the only thing that the word credit meansâunless we applythe terms to specific accounts.

A general ledger has been traditionally composed of amulticolumn page, similar to the one shown in Exhibit B.2. TheDebit column on the right shows the running balance in the cashaccount. You would almost never see a credit balance in thisaccount. The general ledger is often computerized in a similarformat.
In the balance columns, the column on the left is called the debit(DR) column, and the column on the right is called the credit (CR)column. As a shortcut to using formal preprinted two-column paper,accountants often draw a T-account to represent a page in thegeneral ledger. T-accounts shown in Exhibit B.3 are ourrepresentation of the general ledger shown in Exhibit B.2. OneT-account such as cash, shown next, represents a single page in thegeneral ledger. The left side of a T-account is the debit side, andthe right side of a T-account is the credit side.
Cash
Debit Credit
Numbers we put on the left side of the account are called debits,and putting a number in the left column is called debiting anaccount. Debit is a wonderful word that can be an adjective, anoun, or a verb. The same goes for the word credit. The right sideof the account is called the credit side, the numbers we put on theright side are called credits, and putting a number in the rightcolumn is called crediting an account.
In the fifteenth century, a monk named Fra Luca Paccioli wroteabout a system that uses debits and credits with the accountingequation. In his system, the accounting equation stays in balancewith each transaction and the monetary amounts of debits andcredits are equal for each transaction. Hereâs how it works:
1. For the accounting equation, the balance in the accounts on theleft side of the equa- tion (assets ) will increase with debits;and the balance in the accounts on the right side of the equation(liabilities and shareholdersâ equity ) will increase with credits.It follows that the balance in an asset account will decrease withcredits. Liability and equity account balances decrease withdebits. Putting that together,
â¢ asset accounts are increased with debits anddecreased with credits. â¢ liability and shareholdersâequity accounts are increased with credits and decreased
with debits.
This means that when we want to add an amount to our cash balance,we put the number of that amount on the left (in the left column ofthe two columns in the general ledger account for cash)âso thatâs adebit. When we disburse cash and want to subtract the amountdisbursed from the cash account, we put the number of that amounton the right sideâso thatâs a credit. The increase side of anaccount is called its ânormalâ balance. Cash has a normal debitbalance. Because we put the cash we receive on the debit side andthe cash we disburse on the credit side, it makes sense that ourcash account will normally have a debit balance. (Itâs not normalto dis- burse more cash than you haveâitâs pretty unusual.)
In accounting, we do not literally add and subtract from an accountbalanceâwe debit and credit an account to accomplish the samething. If we make an error, we do not erase the mistake and replaceit with the correct answer. Instead, we debit or credit the accountto cor- rect the error and make the account balance correct. Whenaccounting records are kept by hand, all entries are made in ink sothat no entries can be erased or changed. This has been traditionalin accounting to keep the records from being altered. Recordingevery increase to, and decrease from, an account balance gives acomplete record of every change made to the account.
2. Because shareholdersâ equity is increased with credits, allaccounts that increase share- holdersâ equity will increase withcredits. Revenue accounts increase with credits and decrease withdebits. When we make a sale, we credit the sales account.
3. Because shareholdersâ equity is decreased with debits, allaccounts that decrease share- holdersâ equity work in the oppositeway as revenue accounts work. For example, expense accountsâwhere alist of our expenses is keptâincrease with debits. As we incurexpenses, we put the amounts on the left side of expenseaccounts.

The Accounting Cycle
The process that starts with recording individual transactions,produces the four basic financial statements, and gets our generalledger ready for the next accounting period is called theaccounting cycle. Some of the steps in the accounting cycle wonâtmake any sense to you yet, but this appendix examines each indetail. By the end of this appendix, you should be able to explainand perform each step. The steps in the accounting cyclefollow:
1. Record transactions in the journal, the chronological record ofall transactions, from source documents such as invoices. These arecalled journal entries.
2. Post the journal entries to the general ledger. 3. At the end ofthe accounting period, prepare an unadjusted trial balance. 4.Prepare adjusting journal entries and post them to the generalledger. 5. Prepare an adjusted trial balance. 6. Prepare thefinancial statements. 7. Close the temporary accounts. 8. Prepare apostclosing trial balance.
Letâs look at each of these steps in detail.
Step 1: Recording Journal Entries
In the normal course of business, many transactions must berecorded in the accounting system. Letâs look at how thetransactions for a companyâs first year of business would berecorded in a jour- nal. The transactions for the first year ofClintâs Consulting Company, Inc., are shown in Exhibit B.4.

Step 1: Recording Journal Entries
In the normal course of business, many transactions must berecorded in the accounting system. Letâs look at how thetransactions for a companyâs first year of business would berecorded in a jour- nal. The transactions for the first year ofClintâs Consulting Company, Inc., are shown in Exhibit B.4.
The first transaction in Clintâs first year of business is his owncontribution of

graymouse341

The following is a transcript of a video

This video explores the vital role of accounting in one of the world's largest firms. Aon is a reinsurance broker, insurance broker, and employee benefits consultant operating in more than 120 countries. Its goal of being the world's most responsive and client-focused insurance company means it must integrate thousands of professionals in hundreds of disciplines in many countries.

Many view accounting as a primary business language. It is of little use, however, unless you know how to "speak" it. Fortunately, the fundamentalsâthe accounting equation and the double-entry bookkeeping systemâare not difficult to learn.

0:01Clearly, in the financial world,

0:03if you want to be an effective accountant,

0:05you just can't be a numbers person.

0:07You also have to understand people.

0:09You need to know how to debate and hold your

0:11position on the arguments that you take.

0:14âªâª

0:34-Narr: You might not have heard of Aon.

0:36They've brokered deals between clients

0:38and more famous insurance companies.

0:40They often even insure

0:42those insurance companies.

0:45In fact, the only building taller than the

0:47Aon building in Chicago is the Sears Tower.

0:50With over 550 offices in 130 countries,

0:55there's a lot of money involved

0:56and a lot of numbers to keep straight.

0:58So who does all that math?

1:00Well, that's easy.

1:01The pencil pushers, the number crunchers,

1:03bean counters, right?

1:05Accountants are traditionally thought of as

1:07humorless people who type into

1:09pocket calculators all day.

1:11Nothing could be farther from the truth.

1:13Accountants are actually some of the most

1:15important and influential people in business,

1:18and Joe Prochaska is probably

1:20the most important accountant at Aon.

1:23Accounting is the process of recording,

1:25categorizing and interpreting financial

1:28transactions, but there are more creative

1:30aspects to accounting than mere bookkeeping.

1:32That's why Joe is usually smiling.

1:35-Oh, yeah, and my staff is learning to smile.

1:37It's very rarely that they see

1:39me frown, okay, but there are

1:40different kinds of smiles.

1:42-At Aon, managerial accountants interpret

1:46financial data for a company's internal use.

1:49Financial accountants such as CPAs summarize

1:52that information for outside parties

1:54like potential investors.

1:56At the end of the year, Joe uses

1:58a tax accountant to assure that

2:00Aon is in full compliance with

2:02changing tax laws, and to assure that Aon is

2:05taking advantage of the best tax strategies.

2:08But Joe gets the lion's share of the duties

2:10when it comes to Aon's financial information.

2:13-The role I play in the process of handling

2:16all these inputs is reviewing all the reports

2:20that come in so that when our management

2:22takes a look at those financial statements,

2:24they can have some assurance that they're

2:26looking at this as our shareholders will be

2:30looking at it when we

2:31present the information.

2:34-Did you know that every book

2:35you've ever read,

2:36every comic strip, poem and Web page,

2:39has its roots in accounting?

2:40That's because the earliest

2:42written languages were created

2:44to keep track of financial transactions.

2:46Every world culture engages

2:48in some form of trade,

2:49and Aon operates in most of those places.

2:53-The information we get

2:54on a monthly and a quarterly basis

2:56from our different operations around the globe

2:59is stated in a variety of currencies,

3:01yet Aon is a U.S.-based company that publishes

3:05its financials in U.S. dollars.

3:07There's a requirement for some assurance from

3:11a party outside the management

3:12of the company that you've done

3:15a fair job in presenting your financials,

3:17that they've been presented reasonably

3:20and in a consistent manner.

3:23-That's why the

3:24Financial Accounting Standards Board created

3:26the Generally Accepted Accounting Principles,

3:29to help everyone get on the same page

3:31with their accountant.

3:32The Generally Accepted Accounting Principles

3:34and the interpretation are one

3:36of my key functions at Aon.

3:38The Securities and Exchange Commission makes

3:41sure that companies stay on that page.

3:44-In its most adverse reaction,

3:46the SEC also is capable of doing

3:49what they would call an enforcement action.

3:52Many of you have heard of Enron,

3:53okay, and WorldCom.

3:56-The core of those principles is

3:58the six-step accountant cycle.

4:00Pretend you're on Joe's staff for a moment.

4:02First, a hundred different people

4:04send you transaction records

4:06from a dozen different departments.

4:08You collect and organize that pile of

4:10receipts, invoices, bank statements and

4:12purchase orders, account by account,

4:15into a book called a journal.

4:17Now divide all those

4:18transactions into purchases, sales,

4:21investments and so on, in a ledger.

4:24When that's done, do a trial balance

4:26to check your work.

4:28If it's off, go back and find the error.

4:31If it's okay, you can now begin

4:33the real task of accounting,

4:35reporting and analysis.

4:36-The mechanics of doing the accounting,

4:39that doesn't excite me too much.

4:41But going through the philosophy

4:42of what you're trying to accomplish

4:44and how you match revenue and expenses,

4:47which is really the underlying philosophy behind

4:50Generally Accepted Accounting Principles,

4:52to make sure when you recognize the revenue,

4:54you recognize the proportion of the expense.

4:57There's a lot of judgment and

4:58interpretation of what goes into

4:59an individual company in doing that.

5:05The two most basic reports you'll do are the

5:07balance sheet and income statement.

5:10The balance sheet contains the

5:12fundamental accounting equation.

5:14Assets are all the things Aon owns,

5:16like furniture and investments.

5:18Liabilities are how much the company owes

5:21others in the form of loans,

5:22bonds or unpaid bills.

5:24Equity is a little trickier to understand.

5:27Say that Aon owns $100,000, although we can

5:30pretty much guarantee they made a lot more.

5:33If they owe $70,000 in bills and loans to

5:36run the business, the $30,000 difference

5:39is called owners' equity.

5:42That's the amount of actual value

5:43that Aon's stockholders divide up

5:45between them to see how much their

5:47investment is worth at the moment.

5:49The income statement covers a specific period

5:52such as a quarter or year.

5:53It starts with revenue, which is all

5:56of Aon's earnings for the period,

5:58including sales, licensing fees

6:00and gains on investments.

6:02By subtracting the cost of goods sold,

6:04which is the amount of money applied

6:06to producing and distributing a product,

6:09you come up with a gross margin,

6:11or the profit and loss for the period.

6:18Okay, we've been throwing a lot of terms

6:20around, so let's take a break and learn a

6:22little bit more about what Aon does.

6:25One particularly interesting service

6:27has to do with extreme weather.

6:28-For instance, we do catastrophe modeling

6:32for hurricanes so that some of our insurance

6:35clients that may insure a whole lot

6:36of homes along the Gulf Coast to Florida

6:39what happens if a certain hurricane comes?

6:41What type of insurance or reinsurance

6:43protections do they need to make sure

6:46that they're still financially solvent

6:47if a big wind blows and takes out a

6:49lot of their clients' homes?

6:53In addition to that,

6:54one of the things that we innovated,

6:55we were one of the first people

6:56to provide a terrorism model.

7:00And you may be aware that Aon lost

7:02its major operations in New York,

7:04and we lost 175 of our associates

7:06in the World Trade Center disaster.

7:08That certainly spurred us into taking a look

7:11at what can we do to help companies manage

7:14and monitor their exposure to terrorism acts,

7:18and we've done a - have a strategic

7:20partnership with Rudy Giuliani and his group

7:23to try and help companies

7:25prevent and prepare for

7:27if a disaster like that would ever occur again.

7:34Okay, back to the income statement.

7:37Subtract the operating expenses of the company

7:39- that's salaries, electricity and stuff -

7:42from the gross margin to reveal

7:44net income before taxes.

7:46Then, obviously, subtract the taxes,

7:48and you get Aon's net income or net loss.

7:52That figure is what's known as

7:53the bottom line.

7:54If these two reports seem similar,

7:58just remember that the balance sheet is

8:00like a snapshot of the business at any

8:02particular moment, while the income statement

8:05is more like a movie of the company's

8:07performance over a certain period of time.

8:09Now you're at the final and most important

8:12step of the accounting cycle, analysis.

8:15A good example of analysis is budgeting,

8:18which looks at Aon's history to

8:19find ideas for the future.

8:22The budgeting and the planning process

8:23help us analyze and understand that

8:25and create a consensus among management

8:28of what are reasonable expectations

8:30for the coming years,

8:32and it also helps us to give some guidance to

8:34our shareholders on what they should expect

8:36for earnings from our company, which then

8:39I think also helps give people guidance

8:41on what reasonable valuations of our

8:43companies are for our shares.

8:45There are a host of other analyses

8:47you can do, financial ratios

8:49and activity ratios and liquidity tests.

8:52Of course, you don't have to do

8:53all of this math in your head; these days,

8:56most of it can be done by computer software.

8:58I can't think of anybody in our

9:01financial shop that doesn't have a computer

9:03on their desk, and I'm probably one of the

9:04biggest dinosaurs in that I can read all these

9:07financial reports and I can manipulate them,

9:09but I'm too far away from them

9:11to actually create them anymore.

9:13But clearly, the analysis and

9:15the financial reporting is definitely enhanced

9:18by the reporting tools that exist in computers.

9:22Well, your first day as an

9:23accountant went pretty well.

9:25You made a few decisions and learned a little

9:27about how Aon functions financially.

9:29If you're interested in learning more about

9:31accounting as a career,

9:32talk to your instructor.

9:34On the other hand, if accounting isn't for you,

9:36don't worry; your day hasn't been wasted.

9:39Understanding and applying the

9:41basic fundamentals of accounting is a skill that

9:43will help you in almost any

9:45business endeavor you pursue.

9:47Clearly, if you want to do

9:48anything in business - and I am biased,

9:51but there is no better foundation than

9:53having an accounting background,

9:55because that's how businesses are

9:57measured at the end of the day, and the

10:00intrepretation of those numbers are critical.

Question:

The value of the owners' interests is the same as

short-term liabilities.

equity.

revenue minus costs.

liabilities minus assets.

profits plus revenue.

pinkplatypus23

ACC 100 Chapter Notes - Chapter 2: Accounting, Accounting Equation, Financial Statement

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