A100 Chapter 1: Introduction to Financial Accounting

the recording of business transactions, the preparation of reports summarizing these transactions, and the analyzing of financial information

reports prepared from the accounting system

individuals both inside and outside the company

refers to the records and related reports that are available to people outside of the company

looking at the financial statements from the top down and paying particular attention to how various transactions impact the financial statements

1. Financing Activity

2. Investing Activity

3. Operating Activity

transactions that raise funds for the company to operate or expand

transactions in which the company is investing in assets that it will use in its business operations

all of the other transactions that a business engages in

Equity and Debt

refers to ownership (for a corporation, the owners are stockholders)

purchasers of the stock that a corporation issues

1. By receiving dividends from the company

2. By selling their stock at some time in the future at a higher price

payments made from a corporation to its stockholders, but under no legal requirement to make these payments

borrowing money from investors or banks

those who loan the company money

money loaned

the amount that the creditor is charging the borrower for loaning them the money

creditors have the legal right to receive back the money loaned

specific requirements of the loan

maturity date, interest that will accrue, and collateral

the date by which the loan is to be repaid

assets that are pledged by the borrower to the creditor if the borrower is not able to repay the loan

requirements specified in loan contracts

company unable to repay its loans

land, buildings, and equipment

to maintain fair and truthful capital markets

to publicly held corporations

Form 10K annually and a Form 10Q quarterly

SEC requires that all publicly

1. Balance Sheet

2. Income Statement

3. Statement of Stockholders' Equity (or statement of retained earnings)

4. Statement of Cash Flows

5. Note from CEO of company discussing management's performance and goals

6. Notes

gives additional information supporting the data in the financial statements

accounting firm that specializes in public accounting

company is in business to provide accounting services to other companies

to thoroughly examine an entities bookkeeping records, financial accounts, and the policies and procedures of that entity

No, they simply state that they have conducted sufficient tests to allow them to issue an opinion that the financial statements do not contain any material errors

company being audited

Auditor

letter from the company's independent auditors which states the auditor's opinion as to whether or not the auditors have found the financial statements to have been prepared in accordance with the required accounting standards

Most widely known accounting firms

Deloitte, KPMG, EY, PwC

Auditors employed by the company and that audit departments within the company

rules and procedures that help ensure that the employees comply with the policies of the company as well as those of outside regulators

mechanisms in place within a company which inspire managers to report the truth in their financial statements

1. Reputation of managers and business

2. Threat of legal liability

3. Ethics

gives direction on how to account for both common and uncommon transactions of companies

to establish rules so that outside readers of financial statements can trust that statements from different companies will be comparable

GAAP gives specific directions for how to account for all types of transactions

publicly held companies based in the United States have to prepare financial statements using GAAP

Have to maintain the conceptual framework

provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity

relevance and faithful representations (to enhance usefulness: comparability, verifiability, timelines, and understandability)

accounting standards for companies based in most other countries

take responsibility for the IFRS

IFRS gives less guidance and relies on interpretation (IFRS considered principles

organizations that prepare financial statements (ex: company or firm)

1. Service

2. Retail

3. Manufacturing

businesses whose main source of revenue is their knowledge and abilities rather than a product

companies that buy inventory from manufacturers or wholesalers and resell it to consumers at a higher price

business which purchase inventory, process it in some way, and sell a different product than they had originally purchased

Business that is incorporated

established as a separate legal entity

stockholders have limited liability (creditors of a corporation don't have the right to go against stockholders' personal assets)

Regular or C corporation

Must pay income tax

income of a corporation is taxed twice

once when its earned, gain to the stockholder if the corporation pays dividends