1. Financial Statements

2. Direct vs Indirect Costs
Direct Material
Direct Labor
Indirect Material/Labor
Fixed
General/Admin
Selling
Profit
Conversion
cost
Price
Prime
costs
Factory
Overhead
Cost
of goods
manufactured
sold

3. Terms
Bookkeeping
accumulate the results of an entities financial activities
Financial Accounting
external evaluation of financial statements of an entity
Managerial Accounting
use of economic & financial information to plan and control activities of an entity
Cost Accounting
determines product, process, or service costs; a subset of managerial accounting

4. Terms
Tax Accounting
the preperation of income tax returns as a specialized field within accounting - tax planning
Auditing
external review and evaluation of an entitys’s financial records and health
internal audits
government audits
IRS audits

5. Functions of Accounting
Internal Control
all measures used by an organization to guard against errors, waste and fraud
Audits of Financial Statements
investigation of a company’s financial statements to determine the fairness of these statements
Annual Reports
comparative financial statements enable user’s to identify trends in the company’s performance and financial position

6. Principles of Accounting
Principles of accounting dictate that financial statements must show
financial position at end of accounting period
earnings for the accounting period
cash flows during that period
investments by & distribution to owners

7. Transactions Approach
In recording economic activities, accountants focus on completed transactions - those that cause an immediate change in the financial resources or obligations of a company
purchasing raw materials
sales of finished goods
Strength - the reliability of the information that is recorded, based on past events, objectivity

8. Financial Statements Balance Sheet
financial position of a company indicating resources it owns, debts, and the amount of owner’s equity
Income Statement
profitability of the business over the preceeding accounting period
Statement of Owner’s Equity
explains changes in the amount of owner’s equity in the business
Statement of Cash Flows
summarizes cash receipts and cash payments of business over the preceeding accounting period

9. Balance Sheet Statement of financial position
does not show the current market value of an entity’s assests
Assets
economic resources owned by a business and are expected to benefit future operations
cost principle
going concern
objectivity principle
stable dollar assumption
Current Assets - convertible to cash within 1 yr.

10. Balance Sheet Liabilities
probable future sacrifices of economic benefits as result of current obligations
Current Liabilities - must be paid within 1 yr.
Owner Equity
ownership right of proprietors or stockholders
Changes in OE by
investment by owner
earnings from profitable operation of business
withdrawals of cash of other assets
losses from business

11. Owner Equity = Assets - Liabilities
Accounting Equation
Owner Equity = Assets - Liabilities

13. Income Statement
Projects profit/loss of an entity over a period of time
Net Sales - gross sales less returns, defects, etc.
Cost-of-Goods sold - cost of raw material & direct labor
Selling, Gen, Admin - operating expenses of an entity which do not directly contribute to product (sales people, managers, ...)
Interest Expense - interest paid on long/short term debt.
Net Income/share - net income (after tax) divided by outstanding shares

15. Changes to Owner Equity
Begin Balance - last year’s ending balance
Paid-in Capital - sold 10,000 shares at $19 /share stock par value of $10 / share.
common stock = 10,000 x $ = $100,000
addition paid in =10,000 x ($19-$10) = $ 90,000
Retained Earnings - cumulative net income which has been retained for business
Dividends - distribution of earnings to stockholders

16. Changes to Owner Equity
Balance Sheet Income Statement Balance Sheet
8/31/ Revenues /31/97
- Expenses
Net Income
Statement of OE
A =L +OE Begin Balance
Paid in capital changes
Retained earnings
+ Net Income
- Dividends
Ending Balances A = L + OE

17. Retained (97) = Retained (96) + $18,000 = $93,900

19. Statement of Cash Flows
Identify the sources and use of cash during year
Operating Activities
net income $18,000 from income statement
depreciation expense $16,400 from balance sheet added back in because it is not an actual cash outlay

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