Lecture 1

 Accounting is “the language of business.”  More precisely, accounting is a system of maintaining records of a company’s operations and communicating that information to decision makers

 Financial Accounting – refers to information describing the financial resources, obligations and activities of an economic entity used by external parties for decision making  Management Accounting - deals with the methods accountants use to provide information to an organization’s internal users—that is, its own managers  Tax Accounting

 Used by an Organization to: ◦ Develop accounting information ◦ Communicate this information to decision makers  Important factors that affect the structure are: ◦ The company’s needs for accounting information ◦ The resources available for operation of the system

 Interpret and record the effects of business transactions  Classify the similar transactions in a manner that permits determination of the various totals and subtotals useful to management and used in accounting reports  Summarize and communicate the information contained in the system to decision makers

 Investors make decisions related to buying and selling the company’s stock (shares of ownership): Is the company profitable?  Creditors make decisions related to lending money to the company: Will the company be able to repay its debt when it comes due? Will it be able to pay interest in the meantime?

 Owners  Labor Unions  Governmental Agencies  Suppliers  Customers  Trade Associations  General Public

 Management is the design and use of accounting information to achieve the organization’s objectives by supporting decision makers inside the enterprise  Management accounting systems assign decision- making authority over the enterprise’s resources to its employees  Management accounting systems provide a wealth of information for supporting decision-making activity  The system is also used to evaluate and reward decision making performance

 Board of Directors  Chief Executive Officer (CEO)  Chief Financial Officer (CFO)  Vice-presidents  Business Unit Managers  Plant Managers  Store Managers  Line Supervisors

 Financing activities are transactions involving external sources of funding - There are two basic sources of this external funding—the owners of the company who invest their own funds in the business, and creditors who lend money to the company. With this financing, the company engages in investing activities.  Investing activities include the purchase and sale of ◦ long-term resources such as land, buildings, equipment, and machinery and ◦ any resources not directly related to a company’s normal operations. Once these investments are in place, the company has the resources needed to run the business and can perform operating activities.  Operating activities include transactions that relate to the primary operations of the company, such as providing products and services to customers and the associated costs of doing so, like utilities, taxes, advertising, wages, rent, and maintenance.

 We measure resources owned by a company as assets  Amounts owed to creditors are liabilities  The ownership on the business is the owner’s equity – it reflects total worth of business ◦ Owner’s Equity is simply Assets-Liabilities ◦ Stockholder’s Equity is Common stock + Retained Earnings where Retained Earnings is calculated : Retained Earnings = Net income - Dividends

 The accounting equation illustrates a fundamental model of business valuation Assets = Liabilities + Owner’s Equity Increase in an asset = Decrease in another asset Increase in an asset = Increase in a liability Decease in an asset = Decrease in a liability Decrease in an asset = Decrease in equity Decrease in an asset = Increase in another asset

 Revenues are the amounts earned from selling products or services to customers  Expenses are the costs of providing products and services  A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profit/ Net Income  We measure the difference between revenues and expenses as net income Net Income = Revenue - Expenses

Match the term with the appropriate definition. 1. Assets A. Costs of selling products or services. 2. Liabilities B. Amounts earned from sales of 3. Stockholders’ equity products or services. 4. Dividends C. Amounts owed. 5. Revenues D. Distributions to stockholders. 6. ExpensesE. Owners’ claims to resources. F. Resources owned.

 Sole Proprietorship  Partnership  Corporation

 An unincorporated business owned by one person  Not a separate legal entity  Personal liability for business debts – Unlimited liability  Income taxable to owner  The owner has the managerial authority  Entity ceases with retirement or death of owner

 An unincorporated business owned by two or more partners  Not a separate legal entity  Personal liability for partnership debts  Income taxable to partners  Every partner has the managerial authority  New partnership is formed with a change in partners

 Legal entity having an existence separate and distinct from that of its owners  The owners of a corporation are called stockholders (or shareholders)  Ownership is evidenced by transferable shares of capital stock  No personal liability for corporate debts  Files a corporate tax return and pays income taxes on its earnings  Managed by hired professional managers  Indefinite existence

 Financial statements are periodic reports published by the company for the purpose of providing information to external users  Four primary financial statements: 1. Income statement 2. Statement of stockholders’ equity 3. Balance sheet 4. Statement of cash flows

 A financial statement that reports the company’s revenues and expenses over an interval of time Revenues − Expenses = Net income  If expenses exceed revenues, then the company reports a net loss.

 Presents the financial position of the company on a particular date  Assets = Liabilities +Owner’s Equity/Stockholders’ Equity

 Measures activities involving cash receipts and cash payments over an interval of time  There are three fundamental business activities ◦ Operating cash flows include cash receipts and cash payments for transactions involving revenues and expenses ◦ Investing cash flows generally include cash transactions for the purchase and sale of investments and productive long- term assets. Long-term assets are resources owned by a company that are thought to provide benefits for more than one year ◦ Financing cash flows include cash transactions with lenders, such as borrowing money and repaying debt, and with stockholders, such as issuing stock and paying dividends