Chapter 1 Uses of Accounting information and the Financial Statements

Accounting Is an information system that measures, processes, and communicates financial information about an identifiable economic entity Provides information that is essential for decision making

Economic Unit A business is an economic unit that sells goods and services at prices that will provide an adequate return to its owners Profitability – earning enough income to attract and hold investment capital Liquidity – means keeping sufficient cash on hand to pay debts

Business Activites Financing activities – obtaining funding by selling stock, repaying liabilities and etc. Investing activities – investing in buying and selling land, buildings, investments, and etc. Operating activities – everyday expenses to run the business such as payroll, supplies, materials, and etc.

2 major areas of accounting 1.Management Accounting – focuses on information for internal users or management 2.Financial Accounting – which involves generating and communicating accounting information to external users in the form of financial statements

Users of Financial Information Management – provide information for management to achieve their goals of profitability and liquidity Present and Potential Creditors and Investors – use financial information to assess the business’s strengths and weakness Society as a whole – government and public groups – have indirect financial interest such as income taxes (IRS); regulation of stock prices and stock holdings (SEC)

Business Transactions Economic events affecting business’s financial position Exchange of value – purchase or sale Non exchange of value – depreciation, theft, lost or gain on investments For Accounting purposes, a business is treated as a separate entity, separate from its owner(s) bank accounts, resources, debt, and financial records

Monetary Measures States that the business transactions should be measured in terms of money Financial statements are in terms of monetary unit of the country in which the business resides If transactions occur between countries that have different monetary units, the appropriate exchange rate must be used If transactions occur between countries that have different monetary units, the appropriate exchange rate must be used

Corporate form of Business 3 forms of business organizations Sole proprietorship – is an unincorporated business owned by one person Sole proprietorship – is an unincorporated business owned by one person Partnership – own by 2 more persons and is much like a sole proprietorship Partnership – own by 2 more persons and is much like a sole proprietorship Corporation – is a business unit chartered by the state and legally separate from it’s owners (stockholders) Corporation – is a business unit chartered by the state and legally separate from it’s owners (stockholders)

Corporation Stockholders hold shares of common stock in the corporation and are at risk only to the extent of their investment Articles of Incorporation – describes the basic purpose and structure of the corporation Audit committee –to ensure the Board’s objectivity in judging management’s decisions and to engage auditors

Ethics Is a code of conduct that applies to everyday life. Professional ethics is the application of a code of conduct to the practice of a profession.

Integrity – honest Objectivity – impartial Independence – avoidance of relationships that impair to “appear” to impair the objectivity of the accountant Due Care – carrying out one’s responsibility with competence and diligence AICPA Professional Code of Ethics

Institute of Management Accountants (IMA) The IMA professional conduct code emphasizes that they have responsibilities in the areas of competence, confidentiality, integrity, and objectivity.