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Chapter 1

Chapter 1 Study Guide

Financial Accounting
Course Code
G.Quan Fun

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Chapter 1: The Purpose and Use of Financial Statements
Accounting ± the information system that identifies and records the economic events of an organization and then communicates
them to the user (also referred to as the language of business)
Internal Users of Acc. Info. ± Finance, marketing, HR and production
External Users of Acc. Info ± investors and creditor are the main external users
Forms of Business Organization
Proprietor (one owner)
x Usually operated by the owner
x Small start up costs
x Held accountable for all things in the business
x No legal distinction between the business as an economic unit and the owner
Partnership (more than one owner)
unique skill to the business
x Unlimited/limited liability
x Shares indicate your ownership claim
x Many businesses start as proprietorships/partnership and eventually incorporate
x Shareholders only risk losing the amount they have invested in the FRPSDQ\¶V shares ONLY
x Proprietors/partners pay personal income tax on their profits while corp. pay income taxes as separate entities
x Private corp. do not issue publicly traded shares
Business Activities
Financing Activities
Primary ways of raising outside funds for corp. (1) borrowing money (2) issuing shares for cash
x Common shares ± amount paid by investor for shares of ownership in a company
x Other financing activities include repaying debt or repurchasing shares
x Law requires that FUHGLWRU claims be paid before shareholders
Investing Activities
This is after money is raised from financing the company invests the money
x Activities: purchase (sale) of the long-lived resources (assets) [company needs these to operate]
x Every asset is capable of providing future services/benefits that can be short- or long-lived
x While cash can be used for, or result from, and investing activity, it is not itself an investing activity
Operating Activities
Assets with shorter lives (supplies) are resulted from operating activities
x Operating Activities ± transactions which create revenues and expenses
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