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

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

Types of Accounting Information 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

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

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

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

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

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

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

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

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

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

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

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