ACCT1021 Chapter Notes - Chapter 1: Cash Flow Statement, International Financial Reporting Standards, Financial Accounting Foundation

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Financial Accounting
Chapter 1: Financial Statements and Business Decisions
The Accounting System
- Managers or internal decision makers need information about the company’s business
activities to manage the operating, investing, and financing activities of the firm
- Stockholders and creditors or external decision makers need information about these
same business activities to assess whether the company will be able to pay back its
debts with interest and pay dividends
- All businesses must have an accounting system that collects and processes financial
information about an organization’s business activities and reports that information to
decision makers
- Business activities include:
- Financing activities --- focus on financial accounting
- Investing activities
- Operating activities
Introduction
- Accounting- an information system that measures, processes, and communicates
information that is useful for decision making
- Measures
- Expressed in monetary terms financial transactions
- Certain transactions that are economically important are not included in
accounting statements
- Exception: know how much something is worth (buy something)
- Processes
- Classifies and analyzes information that is understandable and useful
- communicates
- Through financial statements, internal and external
- To make informed decisions
- Users and Uses of Accounting
- Insiders (in firms)
- Managers / executives
- Employees (unions)
- Outside users with a direct financial interest
- Present or potential investors (stockholders)
- Present or potential creditors (bonds/banks)
- Outside users with an Indirect Financial Interest (government)
- Taxing authorities
- Regulatory agencies (stock exchanges, SEC, IRS, Commissions)
- Suppliers, customers (relationship because interested in knowing about
the business)
- Other groups
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- Analysts
- brokers
The Four Basic Financial Statements
(1) Balance Sheet
- What do we have?
-Statement of Financial Position or Financial Condition
- Gives the financial position of the company at one point in time
- Reports the company’s resources and claims to those resources
- Elements
- Assets
- Economic resources owned by the company
- Resources or properties owned or controlled by the company
which are expected to provide future economic benefits to
company
- Every asset is initially measured at the total cost incurred to
acquire it
- Ex. cash, land, equipment, prepaid rent or insurance
- Liabilities
- Company’s debts or obligations
- Existing obligations of the company to other entities requiring
future economic sacrifice arising from past transactions
- Amount of financing provided by creditors
- Something that happened in past will make you pay in the future
- Ex. mortgage payable, long term debt, accounts payable, salaries
payable to employees
- Owner’s equity
- Amount of financing provided by owners through investments and
reinvested profits
- Also the residual interest in the assets of a company after
deducting liabilities
- All investments made into the firm that have not been distributed
- ASSETS - LIABILITIES = OWNER’S EQUITY
- Contributed capital - investments by owners
- Retained earnings - cumulative profit earned by the
company that is not withdrawn by the owners
- The Accounting Equation
- ASSETS = LIABILITIES + OWNER’S EQUITY
- Structure
- Heading
- Name of Entity
- Title of Statement
- Specific Date of Statement (year)
- Unit of Measure ($)
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Document Summary

Managers or internal decision makers need information about the company"s business activities to manage the operating, investing, and financing activities of the firm. Stockholders and creditors or external decision makers need information about these same business activities to assess whether the company will be able to pay back its debts with interest and pay dividends. All businesses must have an accounting system that collects and processes financial information about an organization"s business activities and reports that information to decision makers. Accounting- an information system that measures, processes, and communicates information that is useful for decision making. Certain transactions that are economically important are not included in accounting statements. Exception: know how much something is worth (buy something) Classifies and analyzes information that is understandable and useful communicates. Outside users with a direct financial interest. Outside users with an indirect financial interest (government) Regulatory agencies (stock exchanges, sec, irs, commissions) Suppliers, customers (relationship because interested in knowing about the business)

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