Financial Accounting and Business decisions Chapter 1 Financial Accounting and Business decisions © Cambridge Business Publishers

Forms of Business Organization Sole Proprietorship A business owned by one person The most common form of business Partnership A voluntary association of two or more persons for the purpose of conducting a business Corporation A separate legal entity The owners of the corporation are the stockholders The dominant organizational type (based on volume of activity) © Cambridge Business Publishers

Advantages Sole Proprietorship Easiest to form Tax advantages Owner can control © Cambridge Business Publishers

Advantages Partnership Relatively easy to form Tax advantages Broader skill set © Cambridge Business Publishers

Advantages Corporation Easiest to raise capital Easiest to transfer ownership Protection for the stockholders against personal liability © Cambridge Business Publishers

Select the correct answer. Each of the following is an attribute of a corporation except: The owners are the stockholders The dominant organizational type .The most common form of business A separate legal entity © Cambridge Business Publishers

Business Activities Three types of Business activities Financing Investing Operating © Cambridge Business Publishers

Business Activities—Financing Financing Activities A company needs to acquire money in order to support its operations Debt financing Borrowing money from creditors (Loans, Bonds – Interest..) Equity financing Selling stock to investors Ownership Interest © Cambridge Business Publishers

Business Activities—Investing Investing Activities A company needs to purchase resources (long-term assets) in order to run its day-to-day operations. Investing activities involve acquisition or disposition of items such as land, buildings, and equipment. © Cambridge Business Publishers

Business Activities—Operating Operating Activities The day-to-day activities of producing and selling a product or providing a service The reason the company exists © Cambridge Business Publishers

Business Activities Investing Activities Financing Activities Operating Activities © Cambridge Business Publishers

Select the correct answer. Which of the following is an example of a financing activity? Acquisition of land .Borrowing money from a bank Producing and selling a product Disposition of old equipment © Cambridge Business Publishers

Accounting Information and Its Use External Users Investors need to know how profitable the company is compared to its competitors. Creditors need to know if the company has the ability to repay its loans. Regulators need to know if rate increases are justified. © Cambridge Business Publishers

Accounting Information and Its Use Internal Users Management needs to know the profitability of each division. The finance department needs to know if there is enough cash to pay its short-term expenses. Human resources needs to know the effect of a four percent raise for all employees. © Cambridge Business Publishers

Ethics and Accounting Ethics deals with the values, rules, and justifications that govern one’s way of life. Many business have a written code of ethics to help guide the behavior of employees. Accounting organizations such as the American Institute of Certified Public Accountants have a professional code of ethics. Unethical behavior can result in misleading financial statements. Sarbanes-Oxley Act of 2002 was written to help deter unethical behavior. © Cambridge Business Publishers

The Accounting Process Accounting is the process of measuring economic activity of an entity in monetary terms and communicating the results to users. Identify the relevant economic activity Quantify these activities Record the results © Cambridge Business Publishers

Generally Accepted Accounting Principles G.A.A.P. Accounting principles with substantial authoritative support A set of rules that is understood by the users of financial reports A guide to action that can, and does, change over time Differ among countries Efforts are being made to create greater international harmony © Cambridge Business Publishers

Financial Accounting Oversight U.S. Securities and Exchange Commission (SEC) A federal agency whose primary focus is to regulate the interstate sale of stocks and bonds Financial Accounting Standards Board (FASB) Reports to the Security and Exchange Commission (SEC) A nongovernmental entity whose pronouncements establish U.S. GAAP FASB has codified how GAAP is organized and communicated Public Company Accounting Oversight Board (PCAOB) Approves auditing standards, known as generally accepted auditing standards (GAAS) © Cambridge Business Publishers

International Financial Reporting Standards International Accounting Standards Board (IASB) International Financial Reporting Standards (IFRS) Taken the lead role in formulating international accounting principles. Approximately 120 nations or reporting jurisdictions require or permit its use. Reduce information-generating costs of multinational companies. © Cambridge Business Publishers

Assets = Liabilities + Stockholders’ Equity Balance Sheet Reported at a point in time Lists the firm’s assets, liabilities, and stockholders’ equity Assets are the firm’s resources. Liabilities are the firm’s obligations or creditor’s claim on the assets of the firm Stockholder’s equity represents the stockholders’ claim on the assets of the firm. The accounting equation Assets = Liabilities + Stockholders’ Equity Variations of the above equation need to be understood! © Cambridge Business Publishers

Income Statement Reports the results of operations for a given period of time Reports revenues and expenses Revenues are increases in a company’s resources from providing goods or services Expenses are decreases in resources from providing revenue Net income results when revenues exceed expenses © Cambridge Business Publishers

Statement of Stockholders’ Equity Reports the events causing an increase or decrease in a company’s stockholders’ equity during a given period of time. Consists of two parts Contributed capital contributed by the stockholders Earned capital Some companies have a separate statement of retained earnings, but most include retained earnings as part of the statement of stockholders’ equity. © Cambridge Business Publishers

Statement of Cash Flows Reports a company’s cash inflows and outflows during a given period of time. Cash flows from operations reveals cash spent on operating expenses and cash received from the sale of goods and services. Cash flow from investing includes the cash payments and receipts when a company buys and sells long-term assets that it uses in its operations. Cash flow from financing reports the issuance and repurchase of company stock and the cash borrowed from and repaid to creditors. © Cambridge Business Publishers

Relations Among the Statements Net income from the income statement is used to compute ending retained earnings on the statement of retained earnings. Ending common stock, retained earnings, and total equity from the statement of stockholders’ equity is shown on the balance sheet. The ending cash balance on the statement of cash flows is shown on the balance sheet. © Cambridge Business Publishers

Relations Among the Statements The beginning-of-period balance sheet shows the company’s financial position at the earlier point in time. The income statement, statement of stockholders’ equity, and statement of cash flows report activity for a period of time. The end-of-period balance sheet reports the company’s financial position at this later point in time. © Cambridge Business Publishers

Select the correct answer. Which of the following financial statements displays a company’s revenues and expenses? Balance Sheet Statement of Cash Flows Statement of Stockholders’ Equity .Income Statement © Cambridge Business Publishers

Additional Information Management Discussion and Analysis Management’s interpretation of the company’s recent performance and financial condition. Management’s “forward-looking” opinions. Notes to Financial Statements Contains information about assumptions, estimates, measurement procedures, and details behind the summary numbers. Auditor’s Report The report of the independent auditor containing an opinion regarding the financial statements. © Cambridge Business Publishers

Careers in Accounting Present is very good and the future looks even brighter. Private Accounting Analyst, Internal Audit, Tax, Budgeting, Cost Accounting, etc. Public Accounting Auditor, Tax, Consulting Government Auditor, Tax, Budgeting, Criminal Investigation, etc. © Cambridge Business Publishers

Appendix 1A Learning Objective 8 FASB’s conceptual framework. © Cambridge Business Publishers

Conceptual Framework Interrelated objectives and fundamentals for external financial reporting. Financial reporting objectives Financial statement elements Qualitative characteristics of accounting information Recognition and measurement criteria for financial statement items © Cambridge Business Publishers

Financial Reporting Objectives Useful in making financial decisions Helpful in assessing the ability of a company to generate future cash flows Provide information about a company’s economic resources and the claims on those resources © Cambridge Business Publishers

Financial Statement Elements The components of the financial statements Assets Liabilities Stockholders’ equity Investments by owners Distributions to owners Revenues Expenses Gains Losses Comprehensive income © Cambridge Business Publishers

Qualitative Characteristics Contribute to the decision usefulness Relevance Contribute to the predictive and evaluative decisions Faithful representation Complete, neutral, free from error, verifiable Comparability Disclosure required in the notes to financial statements of the chosen accounting policies Verifiability Different individuals could reach the same conclusion. Timeliness and Understandability © Cambridge Business Publishers

Recognition and Measurement Specify the conditions under which a particular asset, liability, revenue, or expense can be recorded in the financial records. Concepts Principles 1. Accounting entity 1. Cost principle 2. Accounting period 2. Revenue recognition 3. Monetary unit 3. Expense recognition (matching) 4. Going concern 4. Full disclosure © Cambridge Business Publishers

Constraints Materiality Cost-Benefit © Cambridge Business Publishers

Select the correct answer. Each of the following is a qualitative characteristic of accounting except .Comprehensive income Verifiability Faithful representation Relevance © Cambridge Business Publishers

Corporate Social Responsibility Triple Bottom Line Companies are focused on more than just the bottom line of the traditional income statement. Financial responsibility goes hand-in-hand with social responsibility. Financial performance Social performance Environmental performance © Cambridge Business Publishers

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