1. Financial Accounting and Business decisions
Chapter 1
Financial Accounting and Business decisions
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2. Forms of Business Organization
Sole Proprietorship
A business owned by one person
The most common form of business
Partnership
A voluntary association of two or more persons for the purpose of conducting a business
Corporation
A separate legal entity
The owners of the corporation are the stockholders
The dominant organizational type (based on volume of activity)
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3. Advantages Sole Proprietorship Easiest to form Tax advantages
Owner can control
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4. Advantages Partnership Relatively easy to form Tax advantages
Broader skill set
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5. Advantages Corporation Easiest to raise capital
Easiest to transfer ownership
Protection for the stockholders against personal liability
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6. Select the correct answer.
Each of the following is an attribute of a corporation except:
The owners are the stockholders
The dominant organizational type
.The most common form of business
A separate legal entity
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7. Business Activities Three types of Business activities Financing
Investing
Operating
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8. Business Activities—Financing
Financing Activities
A company needs to acquire money in order to support its operations
Debt financing
Borrowing money from creditors
(Loans, Bonds – Interest..)
Equity financing
Selling stock to investors
Ownership Interest
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9. Business Activities—Investing
Investing Activities
A company needs to purchase resources (long-term assets) in order to run its day-to-day operations.
Investing activities involve acquisition or disposition of items such as land, buildings, and equipment.
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10. Business Activities—Operating
Operating Activities
The day-to-day activities of producing and selling a product or providing a service
The reason the company exists
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11. Business Activities Investing Activities Financing Activities
Operating Activities
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12. Select the correct answer.
Which of the following is an example of a financing activity?
Acquisition of land
.Borrowing money from a bank
Producing and selling a product
Disposition of old equipment
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13. Accounting Information and Its Use
External Users
Investors need to know how profitable the company is compared to its competitors.
Creditors need to know if the company has the ability to repay its loans.
Regulators need to know if rate increases are justified.
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14. Accounting Information and Its Use
Internal Users
Management needs to know the profitability of each division.
The finance department needs to know if there is enough cash to pay its short-term expenses.
Human resources needs to know the effect of a four percent raise for all employees.
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15. Ethics and Accounting
Ethics deals with the values, rules, and justifications that govern one’s way of life.
Many business have a written code of ethics to help guide the behavior of employees.
Accounting organizations such as the American Institute of Certified Public Accountants have a professional code of ethics.
Unethical behavior can result in misleading financial statements.
Sarbanes-Oxley Act of 2002 was written to help deter unethical behavior.
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16. The Accounting Process
Accounting is the process of measuring economic activity of an entity in monetary terms and communicating the results to users.
Identify the relevant economic activity
Quantify these activities
Record the results
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17. Generally Accepted Accounting Principles
G.A.A.P.
Accounting principles with substantial authoritative support
A set of rules that is understood by the users of financial reports
A guide to action that can, and does, change over time
Differ among countries
Efforts are being made to create greater international harmony
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18. Financial Accounting Oversight
U.S. Securities and Exchange Commission (SEC)
A federal agency whose primary focus is to regulate the interstate sale of stocks and bonds
Financial Accounting Standards Board (FASB)
Reports to the Security and Exchange Commission (SEC)
A nongovernmental entity whose pronouncements establish U.S. GAAP
FASB has codified how GAAP is organized and communicated
Public Company Accounting Oversight Board (PCAOB)
Approves auditing standards, known as generally accepted auditing standards (GAAS)
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19. International Financial Reporting Standards
International Accounting Standards Board
(IASB)
International Financial Reporting Standards
(IFRS)
Taken the lead role in formulating international accounting principles.
Approximately 120 nations or reporting jurisdictions require or permit its use.
Reduce information-generating costs of multinational companies.
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20. Assets = Liabilities + Stockholders’ Equity
Balance Sheet
Reported at a point in time
Lists the firm’s assets, liabilities, and stockholders’ equity
Assets are the firm’s resources.
Liabilities are the firm’s obligations or creditor’s claim on the assets of the firm
Stockholder’s equity represents the stockholders’ claim on the assets of the firm.
The accounting equation
Assets = Liabilities + Stockholders’ Equity
Variations of the above equation need to be understood!
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21. Income Statement
Reports the results of operations for a given period of time
Reports revenues and expenses
Revenues are increases in a company’s resources from providing goods or services
Expenses are decreases in resources from providing revenue
Net income results when revenues exceed expenses
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22. Statement of Stockholders’ Equity
Reports the events causing an increase or decrease in a company’s stockholders’ equity during a given period of time.
Consists of two parts
Contributed capital contributed by the stockholders
Earned capital
Some companies have a separate statement of retained earnings, but most include retained earnings as part of the statement of stockholders’ equity.
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23. Statement of Cash Flows
Reports a company’s cash inflows and outflows during a given period of time.
Cash flows from operations reveals cash spent on operating expenses and cash received from the sale of goods and services.
Cash flow from investing includes the cash payments and receipts when a company buys and sells long-term assets that it uses in its operations.
Cash flow from financing reports the issuance and repurchase of company stock and the cash borrowed from and repaid to creditors.
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24. Relations Among the Statements
Net income from the income statement is used to compute ending retained earnings on the statement of retained earnings.
Ending common stock, retained earnings, and total equity from the statement of stockholders’ equity is shown on the balance sheet.
The ending cash balance on the statement of cash flows is shown on the balance sheet.
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25. Relations Among the Statements
The beginning-of-period balance sheet shows the company’s financial position at the earlier point in time.
The income statement, statement of stockholders’ equity, and statement of cash flows report activity for a period of time.
The end-of-period balance sheet reports the company’s financial position at this later point in time.
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26. Select the correct answer.
Which of the following financial statements displays a company’s revenues and expenses?
Balance Sheet
Statement of Cash Flows
Statement of Stockholders’ Equity
.Income Statement
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27. Additional Information
Management Discussion and Analysis
Management’s interpretation of the company’s recent performance and financial condition.
Management’s “forward-looking” opinions.
Notes to Financial Statements
Contains information about assumptions, estimates, measurement procedures, and details behind the summary numbers.
Auditor’s Report
The report of the independent auditor containing an opinion regarding the financial statements.
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28. Careers in Accounting
Present is very good and the future looks even brighter.
Private Accounting
Analyst, Internal Audit, Tax, Budgeting, Cost Accounting, etc.
Public Accounting
Auditor, Tax, Consulting
Government
Auditor, Tax, Budgeting, Criminal Investigation, etc.
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29. Appendix 1A Learning Objective 8
FASB’s conceptual framework.
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30. Conceptual Framework
Interrelated objectives and fundamentals for external financial reporting.
Financial reporting objectives
Financial statement elements
Qualitative characteristics of accounting information
Recognition and measurement criteria for financial statement items
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31. Financial Reporting Objectives
Useful in making financial decisions
Helpful in assessing the ability of a company to generate future cash flows
Provide information about a company’s economic resources and the claims on those resources
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32. Financial Statement Elements
The components of the financial statements
Assets
Liabilities
Stockholders’ equity
Investments by owners
Distributions to owners
Revenues
Expenses
Gains
Losses
Comprehensive income
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33. Qualitative Characteristics
Contribute to the decision usefulness
Relevance
Contribute to the predictive and evaluative decisions
Faithful representation
Complete, neutral, free from error, verifiable
Comparability
Disclosure required in the notes to financial statements of the chosen accounting policies
Verifiability
Different individuals could reach the same conclusion.
Timeliness and Understandability
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34. Recognition and Measurement
Specify the conditions under which a particular asset, liability, revenue, or expense can be recorded in the financial records.
Concepts
Principles
1. Accounting entity
1. Cost principle
2. Accounting period
2. Revenue recognition
3. Monetary unit
3. Expense recognition (matching)
4. Going concern
4. Full disclosure
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35. Constraints
Materiality
Cost-Benefit
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36. Select the correct answer.
Each of the following is a qualitative characteristic of accounting except
.Comprehensive income
Verifiability
Faithful representation
Relevance
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37. Corporate Social Responsibility
Triple Bottom Line
Companies are focused on more than just the bottom line of the traditional income statement.
Financial responsibility goes hand-in-hand with social responsibility.
Financial performance
Social performance
Environmental performance
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