1-1 Skyline College Chapter 1

1-2 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?

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

1-4 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

1-5 Accounting Clerk Many jobs are available in the accounting profession. Some examples are: Bookkeeper Accountant Accounting Careers

1-6 Accounting Clerk  Usually requires one to two accounting courses  Generally requires little or no experience  Requires computer skills:  Computerized accounting  Word  Excel

1-7 Bookkeeper  Usually requires one to two years of accounting education  Generally requires experience as an accounting clerk

1-8 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

1-9 Public Accounting Auditing Tax accounting Management advisory services 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:

1-10 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

1-11 Governmental Accounting Securities and Exchange Commission (SEC) Internal Revenue Service (IRS) Federal Bureau of Investigation (FBI) Homeland Security involves keeping financial records and preparing financial reports as part of the staff of federal, state, or local governmental units, such as:

1-12 Inside The BusinessOutside The Business Employees Financial Reports Users of Financial Information

1-13 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

1-14  Negotiate wages and benefits  Monitor profit-sharing plans Employees and Unions Use financial information to:

1-15 Sarbanes-Oxley Act  Major change in the regulatory environment. Is designed to crackdown on corporate fraud and corruption.

1-16 Three major legal forms of business entity: Sole Proprietorship Partnership Corporation

1-17 a business entity owned by one person who is legally responsible for the debts and taxes of the business. Sole Proprietorship

1-18 a business entity owned by two or more people who are legally responsible for the debts and taxes of the business. Partnership

1-19 Typical partnerships Professional services such as: Accounting Firms Architectural Firms Dental Practices Medical Practices Law Firms

1-20 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

1-21 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

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

1-23 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. Corporate Ownership Stock is issued in the form of stock certificates and represents ownership of the corporation.

1-24 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. Stockholders

1-25 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.

1-26 Generally Accepted Accounting Principles (GAAP) are accounting standards developed and applied by professional accountants. Publicly owned companies must follow GAAP.

1-27 Development of GAAP SEC FASB Governmental Agency Accounting Profession Delegates to… Has final say Develops GAAP

1-28 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.