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Skyline College

Chapter. 1. Skyline College. The Need for Financial Information. In running a business, you need answers to questions. How much cash does the business have?. How much money do customers owe?. What is the cost of the merchandise sold?. What is the change in sales volume?.

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Skyline College

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  1. Chapter 1 Skyline College

  2. The Need for Financial Information In running a business, you need answers to questions. • How much cash does the business have? • How much money do customers owe? • What is the cost of the merchandise sold? • What is the change in sales volume? • How much money is owed suppliers? • What is the profit or loss?

  3. Accounting Defined Accounting is the process by which financial information about a business is recorded classified summarized interpreted communicated Objective 1 to owners, managers, and other interested parties.

  4. Financial statements are periodic reports of a firm’s financial position or operating results. Included are: Income Statement Balance Sheet Statement of Owner’s Equity Statement of Cash Flows

  5. Accounting Careers Many jobs are available in the accounting profession. Some examples are: Accounting Clerk Bookkeeper Accountant

  6. Accounting Clerk • Usually requires one to two accounting courses • Generally requires little or no experience • Requires computer skills: • Computerized accounting • Word • Excel

  7. Bookkeeper • Usually requires one to two years of accounting education • Generally requires experience as an accounting clerk

  8. Accountant • Usually requires a bachelor’s degree • Most entry-level positions do not require experience. • Accountants work in one of these areas: • Public accounting • Managerial accounting • Governmental accounting

  9. Public Accounting A certified public accountant, or CPA, is an independent accountant who provides accounting services to the public for a fee. They provide services such as: • Auditing • Tax accounting • Management advisory services

  10. Managerial Accounting accounting work carried on by an accountant employed by a single business in industry. They involve working on: • Establish accounting policies • Manage the accounting system • Prepare and interpret financial statements • Prepare tax forms and do tax planning • Prepare internal reports for management

  11. Governmental Accounting involves keeping financial records and preparing financial reports as part of the staff of federal, state, or local governmental units, such as: • Securities and Exchange Commission (SEC) • Internal Revenue Service (IRS) • Federal Bureau of Investigation (FBI) • Homeland Security

  12. Users of Financial Information Inside The Business Outside The Business FinancialReports Employees

  13. Customers Use financial information to: • Determine the economic health of the business • Determine the likelihood that the firm will remain in business to provide parts, service, and support

  14. Employees and Unions • Negotiate wages and benefits • Monitor profit-sharing plans Use financial information to:

  15. Sarbanes-Oxley Act • Major change in the regulatory environment. • Is designed to crackdown on corporate fraud and corruption.

  16. Three major legal forms of business entity: Sole Proprietorship Partnership Corporation

  17. a business entity owned by one person who is legally responsible for the debts and taxes of the business. • Sole Proprietorship

  18. a business entity owned by two or more people who are legally responsible for the debts and taxes of the business. Partnership

  19. Accounting Firms Medical Practices Dental Practices Architectural Firms Law Firms Typical partnerships Professional services such as:

  20. Partners must agree upon: • Amount each partner will contribute • Percentage of ownership of each partner • Share of profits of each partner • Duties each partner will perform • Debts - the responsibility each partner has for the partnership’s debts

  21. a publicly or privately owned business entity that is separate from its owners and has a legal right to own property and do business in its own name; stockholders are not responsible for the debts or taxes of the business. Corporation

  22. Sole Proprietorship Partnership Corporation Ownership 1 owner 2 or more Can be thousands Continues indefinitely Life • Ends when owner: • is unable to • carry on, • dies, or • closes the firm • Ends when partner(s): • dies, • close the firm • withdraws Responsibility for business debts if firm is unable to pay Stockholders can lose only the amount invested Owner Partners individually and jointly

  23. Corporate Ownership Stock is issued in the form of stock certificates and represents ownership of the corporation. Corporate ownership is determined by the number of shares held compared to the number of shares issued by the corporation. Corporations can have new owners daily if their shares are actively traded on stock exchanges.

  24. Stockholders Stockholders (owners of a corporation) have voting rights for certain corporate decisions, one per share. Stockholders can lose only up to the amount of their investment (cost of stock) if the business is unable to pay its debts.

  25. All three forms of business operate under the. . . Separate Entity Assumption. The separate entity assumption is the concept of keeping a firm’s financial records separate from the owner’s personal financial records.

  26. Generally Accepted Accounting Principles (GAAP) are accounting standards developed and applied by professional accountants. Publicly owned companies must follow GAAP.

  27. Development of GAAP SEC Has final say Governmental Agency Delegates to… FASB Develops GAAP Accounting Profession

  28. Audit Report An auditor’s report is an independent accountant’s review of a firm’s financial statements and certifies that the firm has used GAAP.

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