Financial Accounting and Its Environment doc

Financial Accounting Financial Accounting and Its Environment and Its Environment Chapter 1 Major Types of Accounting • Financial accounting provides information to decision makers who are external to the business. – Examples include present and future shareholders, present and future creditors, and government regulators. Major Types of Accounting • Managerial accounting provides information to decision makers who are internal to the business. – This information is not published to people outside of the business. Major Types of Accounting • Tax accounting involves tax compliance and tax planning. – Tax compliance involves the calculation of the company's tax liability after the transactions for a year have been completed. Major Types of Accounting • Tax accounting involves tax compliance and tax planning. – Tax planning involves the consideration of a transaction before it has taken place in order to determine tax consequences. Major Types of Accounting • Accounting Information Systems – The processes and procedures required to generate accounting information. Major Types of Accounting • Nonbusiness Organization Accounting – Deals with the accounting needs of organizations which do not attempt to earn a profit, such as hospitals, colleges, and churches. Overview of Financial Accounting Financial Statements Decision Makers Past Transactions and Other Economic Events Financial Accounting Process The Financial Accounting Process • Categorize past transactions and events. • Measure attributes of those transactions and events. • Record and summarize the measurements. The Financial Accounting Process • The initial valuation of a transaction is generally not changed in the future. – This original measurement is called the historical cost. [...]... whether to extend credit and on what terms Other Users of Financial Statements • Financial analysts and advisors • Customers • Employees and labor unions • Regulatory authorities Generally Accepted Accounting Principles • The most widely used set of accounting principles is called generally accepted accounting principles (GAAP) • GAAP is currently set by the Financial Accounting Standards Board (FASB)... Hearings Issuance of a Statement of Financial Accounting Standard Two sources of FASB's authority: • The acceptance of its rulings by the business community and the accounting profession • The delegation by the Securities and Exchange Commission of its legislative authority to determine GAAP for large, publicly held corporations Groups Involved in Setting Accounting Standards The Role of Auditing • Independent... activities and activities involving shareholders The Statement of Cash Flows Distinguishing Between Financial Statements • The balance sheet reports its components as of one moment in time • The income statement and the statement of cash flows cover a period of time Notes to the Financial Statements • Clarify and expand upon the material presented in the body of the statements Notes to the Financial. .. Statements and the Decisions They Make • Present and potential owners (investors) assess and compare the prospects of alternative investments Present and Potential Owners Evaluate Two Variables • Expected return—the increase in the investor's wealth that is expected over the investment's time horizon • Risk—the uncertainty surrounding estimates of expected return Users of Financial Statements and the... Accepted Accounting Principles • The FASB uses a due-process procedure in setting standards – Ensures that all interested parties are given an opportunity to have input into the standard-setting process FASB’s Due Process Procedures Placement on Agenda Issuance of an Exposure Draft Issuance of an to Comment Discussion Memorandum Public Hearings Invitation or a Public Hearings Issuance of a Statement of Financial. .. set of financial statements – An example is a note which explains a company's inventory pricing policies or the methods used to depreciate fixed assets Annual Reports • Annual reports include the following: – Descriptions of significant events that occurred during the year – Commentary on future plans and strategies – A discussion and analysis by management of the year’s results Users of Financial. ..Primary Financial Statements • The end result of the accounting process is the preparation of the following: – Balance sheet – Income statement – Statement of cash flows The Balance Sheet • The balance sheet shows a firm's assets, liabilities, and owners' equity at one point in time The Balance Sheet • Assets are valuable resources... subtracting liabilities from assets – If assets are $300 and liabilities are $50, then owner's equity must equal $250 The Balance Sheet Assets Liabilities and Owners’ Equity Cash 5,000 Accounts receivable 7,000 Inventory 10,000 Equipment 7,000 Total assets 29,000 Liabilities Accounts payable Notes payable Total liabilities Owners’ equity Total liabilities and owners’ equity 8,000 2,000 10,000 19,000 29,000... summarizes a firm's revenues and expenses for a period of time The Income Statement • Revenues are inflows of assets from providing goods and services to customers • Expenses are the costs incurred to generate revenues The Income Statement • If revenues exceed expenses, then the result is net income • If expenses exceed revenues, then the result is a net loss – If expenses are $500 and revenues are $400,... are $400, then there is a net loss of $100 The Income Statement Revenues Sales Expenses Cost of goods sold General and administrative Tax Total expenses Net income 63,000 35,000 20,000 3,000 58,000 5,000 The Statement of Cash Flows • The statement of cash flows summarizes a firm's inflows and outflows of cash over a period of time The Statement of Cash Flows • The statement has three sections – Operating . Financial Accounting Financial Accounting and Its Environment and Its Environment Chapter 1 Major Types of Accounting • Financial accounting. of Financial Accounting Financial Statements Decision Makers Past Transactions and Other Economic Events Financial Accounting Process The Financial Accounting