Understanding Accounting and Financial Statements Chapter 15 Sections 1-5

Users of accounting information Describe accounting professionals. The foundation of the accounting system Steps in the accounting cycle Financial Statements 1 Learning Objectives Financial ratio analysis The role of budgeting International accounting practices Sections 1-5 Sections 6-8

Accounting is the process of measuring, interpreting, and communicating financial information to enable people inside and outside the firm to make informed decisions. Accounting

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Open book management- sharing sensitive financial information with employees and teaching them how to understand and use financial statements. Viewing financial information may help them better understand how their work contributes to the company’s success. Outsiders use financial data to evaluate investment opportunities. Open Book Management

Financing activities provide necessary funds to start a business and expand it after it begins operating. Investing activities provide valuable assets required to run a business. Operating activities focus on selling goods and services, but they also consider expenses as important elements of sound financial management. Business Activities Involving Accounting

Public Accountants Provide accounting services (auditing, tax preparation, consulting) to individuals or business firms for a fee CPA Management Accountants Provide timely, relevant, accurate, and concise information that executives can use to operate their firms CMA Government and Not-for- Profit Accountants Accounting Professionals

Generally accepted accounting principles (GAAP) encompass the conventions, rules, and procedures for determining acceptable accounting practices at a particular time.GAAP Financial Accounting Standards Board (FASB) is primarily responsible for evaluating, setting, or modifying GAAP in the U.S.FASB The Foundation of The Accounting System

Sarbanes-Oxley Act (SOX) responded to cases of accounting fraud. Created the Public Accounting Oversight Board, which sets audit standards and investigates and sanctions accounting firms that certify the books of publicly traded firms. Senior executives must personally certify that the financial information reported by the company is correct. Resulted in increase in demand for accountants. The Foundation of The Accounting System

Assets- anything of value owned or leased by a business. Liability- claim against a firm’s assets by a creditor. Owner’s equity- all claims of the proprietor, partners, or stockholders against the assets of a firm, equal to the excess of assets over liabilities. The Accounting Equation

Basic accounting equation- relationship that states assets equal liabilities plus owners’ equity. Double-entry bookkeeping- process by which accounting transactions are entered; each individual transaction always has an offsetting transaction to keep the equation in balance. The Accounting Equation What is owned & Who owns it Property & Financial Claim

The Accounting Equation Assets Cash in Bank Accounts Receivable Computer Equip Office Equip Delivery Equip Liabilities Accounts Payable Owner’s Equity Crista Vargas, Capital Classification of Accounts Accounts Receivable - The amount of money owed to a business—money to be received later because of the sale of goods or services on credit Accounts Payable - the amount owed, or to be paid later, to the creditors of a business

Accounting cycle- set of activities involved in converting information about transactions into financial statements. The Accounting Cycle Page 437

Balance sheet— statement of a firm’s financial on a particular date – follows the accounting equation. Photograph of firm’s assets together with its liabilities and owner’s equity Balance Sheet Page 442

Income Statement— financial record of a company’s revenues and expenses and profits over a period of time – also known as a Profit and Loss Statements (or P&L) Firm’s financial performance in terms of revenues, expenses, and profits over a given time period Reports profit or loss Focus on revenues and costs associated with revenues The Income Statement Page 443

Statement of Owners’ Equity — is designed to show the components of the change in equity from the end of one fiscal period to the end of the next Begins with the amount of equity shown on the previous balance sheet Net income is added, and cash dividends paid to owners are subtracted Statement of Owners’ Equity Page 444

Statement of cash flows— a firm’s cash receipts and cash payments that presents information on its sources and uses of cash Accrual accounting— method that records revenue and expenses when they occur, not necessarily when cash actually changes hands Statement of Cash Flows Page 445

Video – Learn Accounting in An Hour #1 Accounting Basics Vocabulary handout