Chapter 1 Notes
Types of Accountants
1. Public Accounting
• Assurance Services (includes Auditing)
• Tax
• Management advisory services (consulting)
2. Private/Industry (working for a particular business)
3. Governmental/Not-for-profit accounting
Accounting- ________________________________________________________________________
Measures --> Processes --> Communicates
Accounting communicates results to decision makers through the_____________ ______________.
The primary role of accounting is to report and provide information to decision makers.
Accounting is the language of business.
Financial vs. Managerial Accounting
Financial Accounting: provides information for _____________ users.
Vs
Managerial Accounting: provides information to _____________ users.
Accounting Rules:
U.S.A International Standards
Securities Exchange Commission (SEC)
Financial Accounting Standards Board (FASB) Int’l Accounting Standards Board (IASB)
Generally Accepted Accounting Principles (GAAP) Int’l Financial Reporting Standards (IFRS)
Accounting guidelines are called ________________________________________ ( ) governed
by the Financial Accounting Standards Board (FASB). Financial statements in the United States are
prepared using GAAP.
Many countries around the world prepare financial statements using a framework called
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International Financial Reporting Standards (______) governed by the International Accounting
Standards Board (IASB).
The goal of financial reporting is to provide information that is __________ ___ _____________.
Information should be relevant and reliable (have faithful representation).
Accounting Assumptions and Principles
Monetary unit assumption: Business events and transactions are recorded in terms of money. It
also assumes that monetary units are of equal worth, inflation and deflation are ignored (assumes
stability)
___________________________________: assets are recorded and carried in accounting records at
their actual (acquisition) cost; cost is not adjusted for changes in market value or replacement costs
General rule: report assets at cost/book value (discussed in Chapter 3)
Cost
-Accumulated Depreciation
=Book Value
Going-concern assumption: It is assumed that each enterprise will continue operating indefinitely
Economic entity assumption: For accounting purposes, each enterprise is assumed to be, and
treated as, an entity separate and distinct from its owners, whether or not this is legally true
4 Business Structures (Economic Entity):
1. ____________________:
a. No special requirements to get started
b. Owned by 1 person
2. ____________________:
a. A written agreement is not required, but best to have one.
b. Owned by 2 or more people
3. ____________________:
a. Separate legal entity that can be public or private
b. Owned stockholders
c. Earnings may be subject to double taxation
4. _____________________________:
a. For tax purposes similar to partnership or proprietorship (hybrid)
b. Legal/Liability purposes: similar to a corporation
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Things to consider when forming a business:
1. _____________________________________________________________________________
2. _____________________________________________________________________________
3. _____________________________________________________________________________
4. _____________________________________________________________________________
The Accounting Equation = ALE (Like the drink!)
The financial statements are based on the basic tool of accounting, the accounting equation:
Assets Liabilities + Stockholders’ Equity
(Economic Resources) = (Claims to Economic Resources)
Contributed Capital + Retained Earnings
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Assets: -________________________________________________________________
-________________________________________________________________
-Examples:________________________________________________________
Liabilities: -________________________________________________________________
-________________________________________________________________
-Examples:________________________________________________________
Equity: -________________________________________________________________
Increases result from:_______________________________________________
Increases result from:_______________________________________________
Equity = Owners’ Equity = Stockholders’ Equity (We will use the terms interchangeably)
Assets
- Liabilities
= Equity
Equity consists of 2 components:
1. _______________________________________________________________________
2. _______________________________________________________________________
Transactions:
A transaction is any event that affects the ____________ position of a business that can be measured.
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Assets Liabilities Stockholders' Equity
+ + + = + - + -
End Bal.
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4 basic financial statements:
1. Income Statement: “Statement of Operations”
Includes: Revenues, Expenses, Gains, Losses; Shows net income or net loss
Best financial statement to evaluate profitability; statement of performance
Formula: ___________________________
2. Statement of Retained Earnings (RE):
Shows earnings kept in the business vs. earnings distributed
Statement of owner’s equity; RE = earnings
Formula: ___________________________
3. Balance Sheet: “Statement of Financial Position”
Includes Assets, Liabilities, Stockholders’ Equity
Best financial statement to evaluate financial condition
Formula: ___________________________
4. Statement of Cash Flows:
Shows where cash came from and where cash went
Will discuss in more detail later in the semester
Formula: ___________________________
Must be prepared in this order:
I Study Really Early Before Cramming Fast
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Chapter 1 Text Examples
1. Owner Contribution
Sheena Bright contributes $30,000 cash to Smart Touch Learning, a corporation, in exchange
for stock.
2. Purchase of Land for Cash
Smart Touch Learning purchases land for an office location, paying cash of $20,000.
3. Purchase of Office Supplies on Account
Smart Touch Learning buys office supplies on account agreeing to pay $500 within 30 days.
4. Earning of Service Revenue for Cash
Smart Touch Learning earns service revenue by providing training services for clients. The
business collects $5,500 revenue in cash.
5. Earning of Service Revenue on Account
Smart Touch Learning performs a service for clients who do not pay immediately. The clients
promise to pay $3,000 within one month.
6. Payment of Expenses with Cash
Smart Touch Learning pays $3,200 in cash expenses: $2,000 for office rent and $1,200 for
employee salaries.
7. Payment on Account (Accounts Payable)
Smart Touch Learning pays $300 to the store from which it purchased office supplies in
Transaction 3.
8. Collection on Account (Accounts Receivable)
Smart Touch Learning now collects $2,000 from the client from Transaction 5.
9. Payment of Cash Dividend
Smart Touch Learning distributes a $5,000 cash dividend to the stockholder, Sheena Bright.
