Accounting 211

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Accounting

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Process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information

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Financial Accounting

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information to users external to the firm (investors and creditors)

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Management Accounting

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information to managers and other internal users

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Tax accounting

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information to government about tax liability and information to taxpayers about tax planning

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Auditing

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verification of accounting numbers

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Securities and Exchange Commission

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created by Congress in 1934, have authority to create accounting rules for companies that issue publicly traded securities

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Financial Accounting Standards Board (FASB)

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part of the SEC that allows to make accounting rules for the U.S.

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International Accounting Standards Board (IASB)

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an organization that creates accounting rules for the world

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Relevance

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information that bears upon the decision-making process

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Reliability

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user can depend on the information

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Consistency

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similar accounting methods are used from one time period to the next

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Comparability

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two or more firms employ the same accounting methods

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Equation for Balance Sheet

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Assets = Liabilities + Stockholder's Equity

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Assets

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Economic resource that is expected to be of benefit in the future

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Liabilities

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economic obligations (debts) payable to an individual or an organization outside the business

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Stockholder's Equity

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Claim of a corporation's owners to the assets of the business.
also called owners' equity or shareholders' equity

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Equation for Income Statement

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Net income = Revenues - Expenses

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Net income

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Excess of total revenues over total expenses. Also called net earnings or net profit

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Revenue

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Amounts earned by delivering goods or services to customers. Revenues increase RETAINED EARNINGS

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Equation for Retained Earnings Statement

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Ending RE = Beginning RE + Net Income - Dividends

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Retained Earnings

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Amount earned over the life of a business by income-producing activities and kept (retained) for use in the business

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Dividends

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Distributions by a corporation to its stockholders

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Equation for Cash Flow Statement

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Change in Cash = Cash flows from operating activities + cash flows from investing activities + cash flows from financing activities

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Income Statement

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Summary of an entity's revenues, expenses and net income or net loss for a specific period.
Also called Statement of Earnings and Statement of Operations

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Balance Sheet

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An entity's assets, liabilities, and stockholders' equity as of a specific date. Also called Statement of Financial position

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Statement of Cash Flows

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Report of cash receipts and cash payments during a period

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Current Assets

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Cash and other assets that can reasonably be expected to be converted to cash or consumed during one year.

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Long-Term Asset

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Assets that can reasonably be expected to last longer than one year

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Current Liabilities

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Liabilities that are expected to be satisfied within one year

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Long-Term liabilities

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Liabilities that are expected not to be satisfied within one year.

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Investing Activities

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Transactions and events that pertain to the making of loans, such as notes receivable, and to the long term assets such as land, buildings, equipment, patents, copyrights, goodwill, bond investments, and stock investments

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Financing Activities

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Transactions and events that pertain to borrowing money and to common stock and preferred stock

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Operating Activities

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Transactions and events that pertain to the profit-making activities of the company. Everything that isn't Investing or Financing activities.

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How are the four financial statements linked?

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-Net income is added to retained earnings as a step in determining ending retained earnings.
-ending retained earnings becomes retained earnings balance on the balance sheet
-ending cash balance on the cash flow statement is cash balance on balance sheet.

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Transaction processing

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activities that transform data about firm's transactions into firm's financial statements.

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Journal

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Chronological record of the economic effects of entity's transactions

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Journal Entry

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Recording of the economic effects of a particular transaction

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Posting

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Involves the transfer of account data from a journal to a ledger

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Ledger

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lists the accounts and their balances

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Trial Balances

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Lists all accounts and their balances to insure against certain kinds of errors