Financial accounting the impact on decision makers 9e chapter 1

Chapter Accounting as a Form of Communication What is Business?  Consists of activities necessary to provide members of society with goods and services LO Exhibit 1.1—Types of Businesses Exhibit 1.2—Forms of Organization LO Business Entities  An organization operated to earn a profit  Sole Proprietorships: organization with a single owner  Partnerships: business owned by two or more individuals  Often used by accounting firms and law firms  Corporations: entity organized under a particular state  Ownership evidenced by shares of stock the laws of Nonbusiness Entities  Organization operated for some purpose other than to earn a profit  Do not have an identifiable owner Organizations and Social Responsibility  U.S business entities recognize the societal aspects of their overall mission and have established programs to meet these responsibilities Nature of Business Activity  Businesses engage in three types of activities: Financing Investing Operating Activities Activities Activities • Borrowing • Sale of stock • Purchase and sale of assets • Sale of products/services • Costs incurred to operate business LO Exhibit 1.3—A Model of Business Activities What is Accounting? Economic Information Various Users Management Stockholders Creditors Financial analysts Government LO Example 1.7—Preparing a Statement of Cash Flows Exhibit 1.6—Relationships Among the Financial Statements Financial Statement Assumptions Economic Entity Concept Going Concern Cost Principle Time Period Assumption Monetary Unit LO Economic Entity Concept  Single, identifiable unit must be accounted for in all situations  Specific entity be the subject of a set of financial statements  Does not intermingle the personal assets and liabilities of the employees or any of the other stockholders Cost Principle  Assets are recorded at the cost to acquire them  Original cost or historical cost—until the company disposes them  More objective than market value Going Concern  Assume an entity is not in the process of liquidation and that it will continue indefinitely  Justifies use of historical cost Monetary Unit  Yardstick used to measure amounts in financial statements  Example: etc  Assumes U.S dollar, Japanese yen, Mexican peso, monetary unit is relatively stable; no adjustment for inflation made in financial statements Time Period Assumption  Artificial segment on the calendar used as the basis for preparing financial statements  Accountants assume that it is possible to prepare an income statement that accurately reflects net income or earnings for a specific time period Setting Accounting Standards  Generally (GAAP) accepted accounting principles  Various methods, rules, practices, and other procedures—preparing financial statements  Securities and Exchange Commission (SEC)  Federal agency with ultimate authority to determine the rules for preparing statements  Financial Accounting  Authority Standards Board (FASB) to set accounting standards LO Setting Accounting Standards (continued)  American Institute of Certified Public Accountants (AICPA)  Professional organization of Certified Public Accountants (CPA)  Public Company (PCAOB) Accounting Oversight Board  Five-member body created by an act of Congress in 2002 to set auditing standards  International Accounting  Develop Standards Board (IASB) worldwide accounting standards Audit of Financial Statements  Most stockholders are not actively involved in the daily affairs of the business  Auditing: examining whether financial statements are fairly presented  External auditor performs various tests and procedures and render his opinion • Auditors’ report is an opinion, not a statement of fact Ethics in Accounting  Ethics plays a critical role in providing useful financial information  Investors and other users must have confidence in a company, its accountants, and its outside auditors that the information presented in financial statements is relevant, complete, neutral, and free from error  Moral and social ethical behavior must be considered while decision making LO Exhibit 1.9—Ethics and Accounting: A Decision-Making Model Sarbanes-Oxley Act  An attempt to bring about major reforms in corporate accountability and stewardship  Most important provisions in the act: Establishment of the Public Company Accounting Oversight Board  Requirement that the external auditors report directly to the company’s audit committee  Clause to prohibit public accounting firms from providing any other services that could impair their ability to act independently in the course of their audit  End of Chapter [...]... accounting  Branch of accounting concerned with providing management with information to facilitate planning and control  Financial accounting  Branch of accounting concerned with the preparation of financial statements for outsider use Exhibit 1. 4—Users of Accounting Information Financial Decision Framework 1 2 3 4 5 Formulate the question Gather information from the financial statements and other... Analyze the information gathered Make the decision Monitor your decision The Accounting Equation  Assets = Liabilities + Owners’ Equity  Left side: valuable economic resources and that will provide future benefit to the company  Right side: indicates who provided, or has a claim to, the assets  Stockholders’ equity or shareholders’ equity: used to refer to the owners’ equity of a corporation LO 5... payments during the period from operating, investing, and financing activities Example 1. 7—Preparing a Statement of Cash Flows Exhibit 1. 6—Relationships Among the Financial Statements Financial Statement Assumptions Economic Entity Concept Going Concern Cost Principle Time Period Assumption Monetary Unit LO 6 Economic Entity Concept  Single, identifiable unit must be accounted for in all situations  Specific... of Accounting Information and Their Needs  Internal Users:  Primarily the managers of a company  Involved in the daily affairs of the business  External Users:  Not directly involved in the operations of a business  Need information that differs from that needed by internal users  Outsiders must rely on the information presented by the company’s management Management Accounting and Financial Accounting. .. period of time EXHIBIT 1. 5 The Relationship Between the Accounting Equation and the Balance Sheet Example 1. 5—Preparing an Income Statement The Statement of Retained Earnings  Summarizes the income earned and dividends paid over the life of a business  Dividends: Distribution of the net income of a business to its owners Example 1. 6—Preparing a Statement of Retained Earnings The Statement of Cash... entity be the subject of a set of financial statements  Does not intermingle the personal assets and liabilities of the employees or any of the other stockholders Cost Principle  Assets are recorded at the cost to acquire them  Original cost or historical cost—until the company disposes them  More objective than market value Going Concern  Assume an entity is not in the process of liquidation and... that it will continue indefinitely  Justifies use of historical cost Monetary Unit  Yardstick used to measure amounts in financial statements  Example: etc  Assumes U.S dollar, Japanese yen, Mexican peso, monetary unit is relatively stable; no adjustment for inflation made in financial statements Time Period Assumption  Artificial segment on the calendar used as the basis for preparing financial statements... involved in the daily affairs of the business  Auditing: examining whether financial statements are fairly presented  External auditor performs various tests and procedures and render his opinion • Auditors’ report is an opinion, not a statement of fact Ethics in Accounting  Ethics plays a critical role in providing useful financial information  Investors and other users must have confidence in... Setting Accounting Standards  Generally (GAAP) accepted accounting principles  Various methods, rules, practices, and other procedures—preparing financial statements  Securities and Exchange Commission (SEC)  Federal agency with ultimate authority to determine the rules for preparing statements  Financial Accounting  Authority Standards Board (FASB) to set accounting standards LO 7 Setting Accounting. .. Accounting Standards (continued)  American Institute of Certified Public Accountants (AICPA)  Professional organization of Certified Public Accountants (CPA)  Public Company (PCAOB) Accounting Oversight Board  Five-member body created by an act of Congress in 2002 to set auditing standards  International Accounting  Develop Standards Board (IASB) worldwide accounting standards Audit of Financial Statements ... Exhibit 1. 4—Users of Accounting Information Financial Decision Framework Formulate the question Gather information from the financial statements and other sources Analyze the information gathered... Branch of accounting concerned with providing management with information to facilitate planning and control  Financial accounting  Branch of accounting concerned with the preparation of financial. .. Make the decision Monitor your decision The Accounting Equation  Assets = Liabilities + Owners’ Equity  Left side: valuable economic resources and that will provide future benefit to the company