CHAPTER 1

FORMS OF ORGANIZATIONS
Sole Proprietorship Partnership Corporation

one owner

two or more owners

entity organized under laws of a particular state

CORPORATIONS: SEPARATING OWNERSHIP OF ASSETS FROM THE DAY-TO-DAY MANAGEMENT OF ASSETS

2. Who hire the managers

Board of Directors Managemen t team: CEO, CFO, COO, CIO, etc

Owners
(shareholders)

1.Owners elect the board members

3. Who are stewards of Owners assets

THE NATURE OF BUSINESS ACTIVITY

Financing Activities
Examples:

Investing Activities

Operating Activities
Selling

Borrowing from Banks

Issuing bonds Sale of stock

Purchasing assets

products/services Costs needed to run the business Other day-to-day activities

WHAT IS ACCOUNTING?
Identifying
Measuring Communicating Economic Information to Internal & External Users

INTERNAL AND EXTERNAL USERS OF ACCOUNTING INFORMATION

Current and Potential Owners

Bankers
Creditors
Internal Users: Management

Financial Analysts

Suppliers
External Users:

Trade Associations

Government Agencies

DECISIONS MADE WITH FINANCIAL INFORMATION

Invest?? Add new product line??

Borrow $$??
Extend credit $$?? Start new business??

Build new plant??

Loan $$??

Sell stocks or bonds??

FOUR FINANCIAL STATEMENTS

1.

2.
3. 4.

Income Statement Balance Sheet Statement of Changes in Retained Earnings Statement of Cash Flows

FINANCIAL STATEMENT ASSUMPTIONS

Economic Entity Concept

Time Period Assumption

Cost Principle

Going Concern

Monetary Unit

ECONOMIC ENTITY CONCEPT

Each entity has its own books, records, and financial statements that are separate from owners No intermingling of personal and business assets and liabilities or income and expenses

COST PRINCIPLE

Record assets at cost paid to acquire them Continue to value assets at historical cost until sold More objective than market value

GOING CONCERN
Assume

business will continue indefinitely into the future

use of historical cost

Justifies

MONETARY UNIT

How we measure amounts in the financial statements (e.g., U.S. dollar, Japanese yen, Mexican peso, etc.) Assumes economic measure is relatively stable; no adjustment for inflation made in financial statements

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

The various methods, rules, practices and other procedures that have evolved over time that regulate the preparation of financial statements

RULES OF THE GAME: WHO DETERMINES ACCOUNTING STANDARDS AND ENFORCES THEM?

SEC-Securities and Exchange Commission FASB-Financial Accounting Standards Board AICPA-American Institute of Certified Public Accountants PCAOB-Public Company Accounting Oversight Board IASB-International Accounting Standards Board

CHAPTER 2

QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION

Understandability to those willing to use it Relevance has capacity to make a difference Reliability represents what it purports Comparability between companies Consistency from one period to the next Materiality will it make a difference to the decision maker? Conservatism all else equal, choose lease optimistic estimate of asset value/earnings

FOUR FINANCIAL STATEMENTS

1.

2.
3. 4.

Income Statement Balance Sheet Statement of Changes in Retained Earnings Statement of Cash Flows

DISNEY 2012 ANNUAL REPORT

See Annual Report from Blackboard

Consolidated

Statements of Income (Income

Statement) Consolidated Balance Sheets Consolidated Statements of Cashflows Consolidated Statements of Shareholders Equity

What does Consolidated Mean?

EQUITY

ACCRUAL ACCOUNTING

Equity: The amount of an assets total value that has been paid off by the owner.
In

a firm it is the portion of the firms total assets creditors can not claim.

Accrual Accounting: We record all revenues and expenses that result in credit transactions as well as cash transactions.

CHAPTER 3

SOURCE DOCUMENTS
Purchase Invoice

Cash Register Tape

Payroll Records

Evidence needed in an accounting system to record transactions

Sales Invoice

Checks

Shipping Document

Receiving Document
LO2

RECORDING TRANSACTIONS AND THEIR EFFECT ON THE ACCOUNTING EQUATION Accounting Equation ASSETS = LIABILITIES + OWNERS EQUITY
Every

transaction has at least two entries:

1. One or more entries on the Right-hand side (RHS) plus one or more entries on the Left-hand side (LHS) that equal each other, OR 2. Two or more entries on the RHS that cancel each other, OR 3. Two or more entries on the LHS that cancel each other.
The

accounting equation must always stay in balance!

EXAMPLE: ISSUE CAPITAL STOCK FOR C

1/2012 Transactions for Glengarry Health Club

The accounting equation remains in balance

EXAMPLE: PURCHASE OF PROPERTY IN EXCHANGE FOR NOTES PAYABLE

Increase on left has corresponding increase on right

EXAMPLE: COLLECTION OF ACCOUNTS RECEIVABLE

Assets were traded: accounts receivable for cash

ACCOUNTS
Accounts are used to record changes to individual items in the financial statements the basic unit for recording transactions the record used to accumulate monetary amounts for each asset, liability, component of stockholders equity, revenue, expense and dividend

SAMPLE CHART OF ACCOUNTS

100199: 100109: ASSETS Cash 200299 200209: 201: 202: Payable LIABILITIES Short-Term Liabilities Accounts Payable Wages & Salaries

101: 102: 110119:

Checking Account Savings Account Receivables

111: Accounts Receivable 120129: 121: 122: 130139: and 131: 132: Prepaid Assets Cleaning Supplies Prepaid Insurance Property, Plant, Equipment Land Building

: 300399 STOCKHOLDERS EQUITY 301: Preferred Stock 302: Common Stock 303: Retained Earnings

400499
500599

REVENUES : EXPENSES :

GENERAL LEDGER

Cash +100 50

A/R +400 100

File or book that contains one page for each account

IDENTIFY AND ANALYZE

What type of activity? operating, financing or investing What accounts are affected and are the accounts increased or decreased? at least two accounts are always affected Which financial statements are affected? just the balance sheet or balance sheet and income statement

EXAMPLE: SELL MONTHLY MEMBERSHIPS ON ACCOUNT (I.E., ON CREDIT)

Sale of Memberships on account: Operating activity Two accounts are affected: Accounts Receivable and Membership Revenue are increased This transaction affects both the Balance Sheet and the Income Statement

EXAMPLE: SELL MONTHLY MEMBERSHIPS ON ACCOUNT

APPENDIX: THE T ACCOUNT

Account Name
Debits are entered on left Credits are entered on right

epresentation of one account in the general ledg

THE T ACCOUNT

Wages Payable
400 dr.
Debits and credits are netted to obtain balance in account

900 cr.

500 cr.

DEBITS/CREDITS AND THE ACCOUNTING EQUATION

ASSETS Dr. Cr.

= LIABILITIES
Dr. Cr.

STOCKHOLDERS + EQUITY Dr. Cr.

Opposite sides of the accounting equation are increased/decreased in an opposite way

NORMAL ACCOUNT BALANCES

Debit
Assets Expenses Dividends

Credit
Liabilities Stockholders Equity Revenues

all increased with debits

all increased with credits