Survey of Accounting

1. Survey of Accounting The Role of Accounting in Business Chapter 1

2. Users of Accounting Information • Internal users • Managers • External users • Investors and creditors • Suppliers • Customers • Employees • Government and other regulatory agencies

3. Financial External users Follows generally accepted accounting principles (GAAP) Supply-driven Highly summarized Basic financial statements Managerial Internal users No regulations regarding what is to be presented or how Demand-driven Very detailed Various forms of reports needed to provide useful information to managers Types of Accounting Information

4. Objectives of Financial Reporting • Provide information useful for making investment, credit and other decisions • Provide information about the amount, timing and probability of future cash flows • Provide information about the entity’s assets and claims against those assets, and the changes in the assets and claims against them

5. Qualitative Characteristics of Accounting information • Primary characteristics • Relevance • Reliability • Secondary characteristics • Comparability • Consistency

6. Basic Accounting Concepts • Entity concept • Information about the entity is kept separate from information about other entities • Going concern concept • It is assumed the entity will continue to operate in the future unless there is evidence to the contrary • Time period concept • The life of the entity is divided into shorter periods for reporting purposes

7. Basic Accounting Concepts • Monetary unit concept • For accounting purposes, all economic events are reduced to a common unit of currency • Historical cost concept • Economic events will be recorded at their value when the event occurred • Objectivity concept • Accounting information should be based on objective evidence

8. Basic Accounting Concepts • Adequate disclosure concept • Financial statements, footnotes, and other information should contain all relevant information needed by users to understand the entity’s financial condition and results of operations • Matching concept • Expenses incurred to produce revenue should be recorded in the same period as the revenue

9. Basic Financial Statements • Income Statement • Reports the results of operations for a period of time • Revenues – expenses = net income (or loss) • Balance Sheet • Reports the financial position of the entity at a point in time • Assets = liabilities + equity

10. Basic Financial Statements • Retained Earnings Statement • Reports the change in the amount of earnings retained within the entity during a period of time • Statement of Cash Flows • Reports the sources and uses of cash during a period of time

11. Categories of Business Activities • Financing Activities • Raising capital to start or expand the business • Borrowing and repaying long-term debt • Issuance or reacquisition of capital stock • Payment of dividends • Investing activities • Acquisition of the resources needed to operate the business • Acquisition and disposal of property, plant and equipment

12. Categories of Business Activities • Operating activities • Day-to-day activities conducted to carry out the purpose of the business • Sale of goods or services • Incurrence of expenses

13. Elements of Financial Statements • Asset • Probable future economic benefits resulting from past transactions • Liability • Probable future sacrifice of economic benefits resulting from past transactions • Equity • Residual ownership in the assets of an entity after the liabilities have been satisfied

14. Elements of Financial Statements • Revenue • Inflow of assets or settlement of liabilities as a result of conducting the main activities of the entity • Expense • The consumption of assets or incurrence of liabilities as a result of conducting the main activities of the entity • Dividend • Distribution of assets to the owners of the entity