Principles of Financial Accounting Chapter 1

Forms of Business Organizations Sole Proprietorship Easy to establish Owner is control of assets and operations Tax advantages Partnership Easy to establish Broader skills and resources Tax advantages

Forms of Business Organizations (cont) Corporations Easier to transfer ownership Easier to raise capital No personal liability beyond investment

Definition of Accounting Provides information for decision making. An information system that identifies, records, and communicates the economic events of an organization to interested users.

Users of Accounting information Internal Users Management External Users Investors Creditors Tax authorities Regulatory agencies Competitors Customers, labor unions

Types of Business Activities Financing Activities Sale of stock (ownership) Dividends Borrowed funds Loans Bonds

Types of Business activities (cont) Investment Activities Purchases of Property, Plant & Equiment Operating Activities Revenues An increase in assets arising from the sale of a product or performance of a service. Expenses The cost of assets consumed or services used in the process of generating revenues.

Financial Statements Income Statement Revenues – Expenses = Net income Income statement covers only a specified period of time. Statement of Retained Earnings Reflects the beginning RE balance plus net earnings for the period minus dividends paid during the period.

Financial Statements (cont) Balance Sheet Lists assets, liabilities, and owner’s equity at a specific date. Statement of Cash Flows Provides information regarding the cash receipts and cash payments during a period of time.

Financial Statement (cont) Notes to the financial statements Provides additional disclosures regarding Valuation methods for inventory, depr., etc. Liabilities and other obligations Possible lawsuit losses, pension obligations Auditor’s Report An unqualified opinion should lend confidence to the numbers in the financial statements.

GAAP Monetary Unit Assumption Economic Entity Assumption Time Period Assumption Going Concern Assumption Cost Principle Full Disclosure Principle

Assignment ALL Brief Exercises starting on page 33 E1-4 Part (a) only page 35 E1-10 page 37 BYP1-1 page 42 BYP1-10 page 45