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ADMS 2500 Financial Accounting Notes.docx

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Administrative Studies
ADMS 2500
Brian Gaber

ADMS 2500 Accounting Notes Module 1: Introduction Fields of Accounting Activity Public- government; not for profit -includes both financial and managerial accounting -they engage in auditing activities, including governmental agencies, private firms that do business with governmental units, act as consultants to clients -accounting investigations of firms -requires license to practice by their professional association Private- profit and not for profit -employers include manufacturers, wholesalers, retailers; job includes data keeping, reporting, designing EDP systems -assist management in planning and controlling the firms operations Controller is the head of the accounting department; interacts with executive management Internal auditing staff reports to a management officer ; found in large companies -internal auditor investigates policies, provide reliable info, promote operational efficiency Accounting as an Information System -managers need the accounting records to use the data to summarize accounting reports -serves both people in and out an org; detailed accounting info is often needed to be reported to different levels of government -helps measure managements performance, compares investments, make decisions on loans Evolving Face of Accounting Accounting- process of recording, classifying, reporting, interpreting financial data of an organization -bookkeeper is a job, accountant is a career -financial accounting deals with preparation of highly condensed financial reports for use by interested parties outside the organization Managerial accounting- preparation of reports for managers within a firm -users of info within the firm can specify the types of info they need to make decisions; managerial accounting reports satisfy these needs -deciding whether to borrow short term, determining what prices to charge, how to route special order Financial accounting- preparation of reports for people outside a firm -banks use it to determine whether to give a loan, investors use it to decide whether to buy shares -more standardized format and content than managerial -most common reports for external users are the financial statements that conform with GAAP Financial Reporting Process External environmentAccounting systemPublished financial statements, internal management reports, special reports for regulatory and other bodies Financial Statements Income statement -tells how well an enterprise is doing, if its profitable -shows results of operating activities for a period of time Balance sheet -used when deciding how an enterprise will do in the future, if it has needed resources, obligations -shows their assets, liabilities, owners residual interest at a point in time Statement of Equity -used when deciding if owners are withdrawing resources or investing more resources -shows increases in equity from operating profits and new investment of assets to owners Cash flow statement -used when deciding if enterprise generates enough cash to self-sustain; determining where it gets cash to survive, how it uses any excess cash -shows the change in cash and cash inflows/outflows from operating, financing, investing activities Managerial Data and Reports -though a major accounting function is to give management the data thats shared to outsiders, they also need specific information like unit cost, profit earned, long-range budgets -is only available to firms high-level management due to its strategic nature Special Reports -some companies required to report periodically to regulatory agencies so they can monitor solvency or the rate of income to be earned -are based mainly on accounting data, but some require reports that comply with GAAP Financial Accounting Statements -important part of accounting is to show orgs financial position and the results of its operations -useful for planning and control (financial accounting data are primarily historical) -are the main source of info for outside parties other than governmental agencies -independent auditors go over them to ensure theyre valid Financial statement- grand summary of orgs accounting/economic activity for the period -also known as the annual report -includes cash flow statement, balance sheet, income statement, statement of retained earnings, auditors report, footnotes; was on average 50 pgs long -other things that are found include letter from firms president summarizing previous yrs activities, managements discussion of financial position and results for the org, list of directors and officers, promotional materials (pictures of firms products and employees), product descriptions and photos to promote company image Green accounting- publishing annual reports online to conserve trees Balance Sheet -lists firms assets, liabilities, owners equity on a given date -heading includes name of org, title of statement, date when the statement was prepared -body includes assets, liabilities, owners equity Liability + Equity = Assets Double-entry bookkeeping- for every change in an A/L/OE, at least one other change occurs in balancing -when the rule is applied, the change in OE will equal the change in net assets (A L) Assets: -can be expressed in monetary terms (land, buildings, equipment) -listed with most liquid assets at the top -are recorded at their costs or acquisition prices -costs may be reduced if some assets depreciate (land, building) or if supplies are used up -defining an asset is a thing of value owned -accounting principles dont allow upward valuation of assets (very difficult/impossible) Liabilities: -are debts or obligations the firm must pay back in money or service in the future -are listed on balance sheet in the order that theyre due -ST liabilities (notes payable for money borrowed on short periods, salaries owed employees) first -LT debt follows, including bonds and mortgages -most are payable in cash but some may be in services Owners Equity: -shown below liabilities -calculated by Assets Liabilities -if the business is a corporation we say shareholders equity, not owner -comprises contributed capital and retained earnings -contributed capital reflects funds invested by shareholders Retained Earnings -reps earnings reinvested by management for the benefit of shareholders -sum of prior earnings of a firm in excess of dividends paid out to shareholders -management directs use of a firms assets so in LT they get more assets than give up obtaining them -once a firm has earnings (net income), the effect is shown as retained earnings Balance Sheet Classification -current assets cash, or assets expected to be turned into cash or sold within 1 year from date on BS -cash, temp investments in securities, A/R from customers, inventories -current liabilitiesliabilities expected to be paid within a year -notes payable to banks, A/P to suppliers, salaries payable to employees, taxes payable -non-current assetsheld and used for several years -land, buildings, equipment, patents, LT investments in securities -non-current liabilities firms long term sources of funds Valuation -there are two valuation bases that determine the dollar amt of L/A on a balance sheet: Cash/cash equivalent valuation; acquisition/historical cost valuation -cash and A/R are shown at amt of cash in the bank or expected to be collected -liabilities are shown at present value of amt required to pay it off -remaining assets either shown at acquisition cost or acquisition cost net of accumulated depreciation -inventories, land, buildings, equipment, patents -common stock reports at the amt invested by owners when the shares were first issued Income Statement -second principal financial statement -shows results of operating activities of a firm for a period of time, how successful a firm was in achieving their goal for a given time span -shows the flows of a firm so people outside the co can evaluate managerial performance -reports the sources and amts of a firms revenues and amt of a firms expenses that net to earnings Net income = Revenue Expenses -net income and earnings are synonyms Revenue- inflows of assets from selling g&s Expenses- outflow of assets (increase in liabilities) used in generating revenues -COGS is the cost of inventories sold to customers -each expense will bring a decrease in asset or increase in liability -firm tries to generate excess of net asset INflows from rev, rather than net asset OUTflows from exps -net loss occurs when expenses for a period exceeds revenues Classification of Revenues and Expenses -it can help in distinguishing different expenses and matching them to the proper revenue -expense flows are incurred to earn revenue (some can be identified with particular rev transactions, others are identified only with specific classes of revenue) 1) Match COGS with the revenue from the sale -difference between the two brings gross profit Gross profit ratio- ratio of gross profit to sales -will only dramatically change if there are dramatic changes in policy 2) Expenses of operating functions (marketing, accounting, management) are deducted to derive operating profit of the firm for the period Operating profit- primary activities of the firm before considering portion of net income to pay as tax -some firms depend on shareholders for capital, while others borrow sums for the same purpose -those who depend primarily on shareholders incur no interest expense 3)Results of the financial function are deducted separately from the operating profit -result of financial fnc is interest exp, but can be offset by int received fr investment in financial assets
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