Collecting and Organizing Information

Using Free Markets to Set Resource Priorities  Market—a group of people or entities organized to exchange items of value  Three participants:  Consumers—use resources  Conversion agents (businesses)—transform resources such as trees into desirable products such as furniture  Resource owners—control the distribution of resources to conversion agents

Using Free Markets to Set Resource Priorities  Added value in the transformation process:  Profit  Income  Earnings  Accountants measure the added value as the difference between the cost of the product/service and the selling price

Using Free Markets to Set Resource Priorities  Financial resources:  Investors—provide financial resources in exchange for ownership interests in the business. Expect a return on their investment  Creditors—lend financial resources to businesses. They expect to be repaid borrowed resources plus interest

Using Free Markets to Set Resource Priorities  Physical Resources—natural resources  Move through numerous stages of transformation  Owners of physical resources seek to sell those resources to businesses with high earnings potential because profitable businesses are able to pay higher prices and make repeat purchases

Using Free Markets to Set Resource Priorities  Labor Resources—intellectual and physical labor  Workers prefer businesses that have high income potential because they can offer higher wages and continued employment

Accounting Provides Information  Investors, creditors, and workers rely heavily on accounting information to evaluate which businesses are worthy of receiving resources  Stakeholders—other people and organizations that have an interest in accounting information  Resource providers, financial analysts, brokers, attorneys, government regulators, and news reporters

Accounting Provides Information  There is a direct link between businesses and resource providers  Accounting information identifies companies with high earning potential:  Higher profits  Make interest payments  Repay debt  Pay higher prices  Provide stable, high-paying employment

Accounting Provides Information  There is an indirect link between businesses and stakeholders:  Accounting information is used for advising clients:  Brokers, analysts, attorneys  Accounting is used to assess corporate compliance  Government agencies (IRS, SEC)  Accounting is used to report information  News reporters

Types of Accounting Information  Financial accounting—information given to external users--stakeholders such as investors, creditors, lawyers, financial analysts  Managerial accounting—information used by internal users—managers and employees who work within a business  More detailed information than given to external users

Nonbusiness Resource Usage  Non-for-profit entities  Religious groups, foundations, peace corps, etc.  Accounting systems measure:  Cost of goods and services  Efficiency and effectiveness of operations  Ability to continue providing goods and services  Serves a host of stakeholders  Taxpayers, contributors, lenders, suppliers, employees, managers, financial analysts, attorneys, beneficiaries

Careers in Accounting  Public Accounting—CPA—paid a fee for services provided:  Audit services—examining accounting records to issue an opinion about whether the financial statements conform to generally accepted accounting principles  Tax services—taxes due and tax planning  Consulting services—accounting systems, personal financial advice

Careers in Accounting  Private Accounting—work for a specific company or nonprofit organization  Duties:  Classifying and recording transactions  Billing and collecting  Ordering merchandise  Paying suppliers  Preparing and analyzing financial statements  Developing budgets  Measuring costs  Assessing performance  Making decisions

Measurement Rules  Financial Accounting Standards Board (FASB)  Privately funded organization with primary authority for establishing accounting standards in the US  Generally accepted accounting principles (GAAP)  Financial reports issued to the public must follow GAAP  Management Accounting reports are not required to follow GAAP  Internal reports can be in whatever fashion best suits the effective operation of the company

Reporting Entities  Accountants gather and disclose financial information about specific people or businesses  There may be many reporting entities  Investors  Customers  Creditors  Employees  Separate accounting records are maintained for each entity

 There are 10 elements to financial statements:  Assets  Liabilities  Equity  Contributed capital  Revenue  Expenses  Distributions  Net income  Gains  Losses

Using Accounts to Gather Information  Account--Detailed information regarding each element  More detail, greater number of accounts  Types and numbers of accounts vary by business depending on information need of stakeholders

Accounting Equation Assets = Liabilities + Stockholders’ equity  Assets= things the business owns  Cash  Land  Equipment  Liabilities = things the business owes  Mortgage  Loans  Stockholders’ equity  Ownership interest in the business

Accounting Equation Expanded Assets = Liabilities + Shareholders’ Equity Assets = Liabilities + Common Stock + Retained Earnings

1.RCS increases assets (cash). 2.RCS increases stockholders’ equity (common stock). Asset Source Transaction Event 1: Rustic Camp Sites (RCS) was formed on January 1, 2016, when it acquired $120,000 cash from issuing common stock.

Event 2: RCS acquired an additional $400,000 of cash by borrowing from a creditor. 1.RCS increases assets (cash). 2.RCS increases liabilities (notes payable). Asset Source Transaction

 Event 3: RCS paid $500,000 cash to purchase land. 1.RCS decreases assets (cash). 2.RCS increases assets (land). Asset Exchange Transaction

 Event 4: RCS obtained $85,000 cash by leasing campsites to customers. 1.RCS increases assets (cash). 2.RCS increases stockholders’ equity (retained earnings). Asset Source Transaction

 Event 5: RCS paid $50,000 cash for operating expenses such as salaries, rent, and interest. 1.RCS decreases assets (cash). 2.RCS decreases stockholders’ equity (retained earnings). Asset Use Transaction