Chapter 1 The Financial Statements

Two Kinds of Accounting:

• Financial accounting provides information for people outside the firm.
• Management accounting generates inside information for the managers.

AICPA:

• American Institute of Certified Public Accountants

Organizing a Business: A business can take 1 of several forms:

• proprietorship: A proprietorship has a single owner, called the proprietor.
• partnership: A partnership has 2 or more persons as co-owners, and each owner is a partner (LLP).
• limited-liability company (LLC):A limited-liability company is one in which the business (and not the owner) is liable for the company’s debts.
• corporation: A corporation is a business owned by the stockholders, or shareholders.

GAAP: Generally A

ccepted Accounting Principles

• Accountants followed professional guidelines.
• In US, Financial Accounting Standards Board (FASB) formulates GAAP, provide information for making investment and credit decisions.

The Entity Concept

• Organization stands apart from other economic unit.

The Reliability Principal

• also call the objectivity principal.
• accounting records are based on information supported by object evidence.

The Cost Principle

• assets and services should be recorded at their actual
• historical cost (not the market value).

The Going-Concern Concept

• assumes that the entity will remain in operation long enough to use existing assets.

The Stable-Monetary-Unit Concept

• accountants assume that the dollars purchasing power is stable and ignore inflation.

THE ACCOUNTING EQUATION

• Assets = Liabilities + Owners’ equity (also called capital)

Assets:

• Assets includes cash, merchandise inventory (or just inventory), property, plant, and equipment.
• Land, buildings, and equipment are called property, plant, and equipment (abbreviated as PPE), plant assets, or fixed assets.

Liabilities include a number of payables, such as accounts payable and notes payable.

• note payable is a written promise to pay on a certain date - “short-term borrowings."
• Long-term debt is a liability that’s payable beyond 1 year

Owners’ Equity

• Assets − Liabilities = Owners’ Equity
• Assets = Liabilities + Stockholders’ Equity
• Assets = Liabilities + Paid-in Capital + Retained Earnings

Paid-in Capital

• Stock

Retained Earnings

• Retained Earnings = Revenues - Expenses

net income, net

earnings, or net profit.

• Revenues > Expense

net loss

• Revenues < Exprese

Dividends are distributions to stockholders of assets (usually cash)