INTRO TO FINANCIAL ACCOUNTING – Key Terms/Concepts
purpose of accounting – to measure the economic performance of the
business and report it to decision makers.
types of decision –makers:
1. Internal - management
2. External examples:
-Investors/potential investors
-Lenders/potential lenders
-Government
IRS - (Internal Revenue Service)
Administer and enforce U.S. federal tax law
Examples of securities: stocks, bonds
SEC – (Securities & Exchange Commission)
Regulate U.S. public financial markets with
the goal of protecting public investors
What Is Financial Accounting?
financial accounting – preparing financial statements according to U.S.
GAAP; focus is on external decision-makers
GAAP – Generally accepted accounting principles
Accounting standardization fosters comparability between
different companies.
GAAP is developed by Financial Accounting Standards Board.
FASB (not part of government)
SEC requires U.S. public companies to use GAAP.
Reports containing GAAP financials (for a public co.):
1. Form 10-K (annual report to the SEC)
2. Form 10-Q (quarterly report to the SEC)
Senior management (CEO and CFO) is responsible for
preparing the financials in these reports that public companies
must prepare.
The Financials
(Statement of financial position)
(Statement of financial condition)
1. balance sheet – reports the business’s assets, liabilities, and owners’ equity as
of a specified date (balance sheet date)
asset – Anything owned
examples of asset accounts in the system:
land
equipment
cash
Business Customers (B2B – business-to-business)
Accounts Receivable (A/R) – amounts due from
customers for goods and services the co. has already
provided to them
Inventory - goods available for sale in the normal course
of business
liability – Anything owed
examples:
1. Accounts Payable (A/P) - amounts due to suppliers for
inventory and services the co. has already received
Accounts – individual
items that the company
keeps track of in the
books/system
2. Salaries/Wages Payable – amounts owed to employees
for work they have performed
3. Note Payable - Promissory Note (Loan Agreement)
3. Bonds Payable
When a co. issues bonds (sells bonds to investors),
it is borrowing money.
Stockholders’ Equity
owners’ equity – the owners’ investment in the business
(ways owners invest in the business)
categories of owners’ equity:
(contributed capital)
(invested capital)
1. paid-in capital – out-of-pocket investments in the company
made by the owner(s)
Preferred Stock + Additional Paid-In Capital for Preferred Stock =
amount received by the corporation from the preferred shareholders
Common Stock + Additional Paid-In Capital for Common Stock =
amount received by the corporation from the common shareholders
2. Retained Earnings – reinvested profits
3. Other
(Statement of operations; P&L (profit and loss))
2. income statement – shows the business’s revenues, expenses, and net income
for a specified period
2 types of sales
(cash sales) (credit sales; sales on account A/R)
revenues (sales) – amounts received, or to be received, from the sale of
goods or services
Revenue – expenses = net income
R
(E)
---------------------Net Income (Loss)
=============
Profit
Earnings
“the bottom line”
expenses – resources used/consumed, or liabilities incurred, to generate
sales
examples:
supplies expense
wages expense
marketing expense
utilities expense
rent expense
3. statement of cashflows – shows the business’s cash inflows and outflows for a
specified period and the net change in cash for the period
Net change in cash != net income
NOT THE SAME AS
4. notes to the financials – clarify and expand upon the info in the financials
Consolidated Financial Statements
consolidated financial statements – of a parent and its subsidiary companies
parent company – owns another company (co.)
subsidiary – owned by another company (co.)
sister companies - companies that share a common parent company
The Basic Accounting Equation
$
R
A = L + OE
(E)
|
------------|-----------------------------→Net Income
========
paid
debt
Everything owned (A) is (=) financed by either borrowed capital (L) or (+) the owners’
investment in the business. (OE)
Equity Capital
2 types of capital: debt capital AND equity capital
Overview Of The Accounting Cycle
END
PRODUCT
transaction
accounting
transaction
entered into
practices
generate
occurs
-------→ accounting ----------→ and procedures ----------→ financial
system/books
statements
transaction – an economic exchange between the co. and another party
actual
Transactions are recorded at historical cost.
Items remain on the books at historical cost (general rule; there are
exceptions). Therefore, a U.S. GAAP balance sheet does NOT
report current market value.
Market value - the price a buyer would pay to an unrelated seller
The financial statements summarize the detailed data in the accounting
system.