CHAPTER 1: INTRODUCING FINANCIAL ACCOUNTING

• ACCOUNTING, the “language of business”, is an information and measurement

system that identifies, records, and communicates relevant, reliable, and
comparable information about an organization’s business activities

• FINANCIAL ACCOUNTING aims at serving external users by providing them with

financial statements

o External Users are not directly involved in running the organization (ex.
shareholders, investors, lenders, directors, customers, suppliers, regulators,
layers, governments, legislators, brokers, and the press)

• MANAGERIAL ACCOUNTING serves the decision-making needs of internal users

o Internal Users are those directly involved in managing and operating an

organization (ex. research and development managers, purchasing
managers, human resource managers, production managers, distribution
managers, marketing managers, and service managers)
OPPORTUNTIES IN ACCOUNTING
Financial Managerial Taxation Accounting-
• Preparation • General accounting • Preparation Related
• Analysis • Cost accounting • Planning • Lenders
• Auditing • Budgeting • Regulatory • Consultants
• Regulatory • Internal auditing • Investigations • Analysts
• Consulting • Consulting • Consulting • Traders
• Criminal Investigation • Controller • Enforcement • Directors
• Treasurer • Legal services • Underwriters
• Strategy • Estate plans • Planners
• Appraisers
• FBI investigators
• Market researchers
• Systems designers
• Merger services
• Business valuation
• Forensic accounting
• Litigation support
• Entrepreneurs
• ETHICS are beliefs that distinguish right from wrong, that are accepted standards
of good and bad behavior

• GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) aims to make

information in financial statements relevant, reliable, and comparable, and governs
financial accounting practices

o The Financial Accounting Standards Board (FASB) and the Securities

and Exchange Commission (SEC) are two main groups that establish
generally accepted accounting principles in the US

o The International Accounting Standards Board (IASB) issues

International Financial Reporting Standards (IFRS) that identifies preferred
accounting practices

• ACCOUNTING PRINCIPLES
 o Cost Principle – Accounting is based on actual cost

o Revenue Recognition Principle – (1) Revenue is recorded when earned,

(2) proceeds from selling products and services need not be in cash, and (3)
revenue is measured by the cash received plus the cash value of any other
items received

o Matching Principle – A company must record its expenses incurred to

generate the revenue reported

o Full Disclosure Principle – A company must report the details behind

financial statements that would impact users’ decisions

• ACCOUNTING ASSUMPTIONS

o Going-concern Assumption – Accounting information reflects presumption

that the business will continue operating instead of being closed or sold

o Monetary Unit Assumption – Transactions and events can be expressed in

money units

o Time Period Assumption – Life of a company can be divided into time

periods

o Business Entity Assumption – Business is accounted for separately from

other business entities, including its owner

• LEGAL FORMS OF A BUSINESS ENTITY

1. Sole Proprietorship: owned by 1 person, not a separate legal entity

(unlimited liability) from its owner, not subject to a business income tax

2. Partnership: owned by 2 or more, must have agreement between partners

to run the business, not legally separate from its owners (unlimited liability:
limited partnership, limited liability partnership, limited liability company*)

3. Corporation: legally separate from owners, acts through managers,

shareholders are not personally liable for corporate acts, double taxation,
ownership is divided into shares/stock/common stock

• SARBANES-OXLEY (SOX) requires that public companies apply both accounting

oversight and stringent internal controls, leading to more transparency,
accountability, and truthfulness in reporting transactions; Auditors also must
verify the effectiveness of internal controls

ASSETS = LIABILITIES + EQUITY

Resources owned or controlled by the
company; Receivable is used to refer to
Residual
an asset that promises a future inflow of
resources
Creditors’ claims on assets; Owner’s claim on assets; Also
Payable refers to a liability that called Net Assets or
promises a future outflow of equity; Has two parts:
resources contributed capital and
retained earnings

ASSETS = LIABILITIES + CONTRIBUTED CAPITAL + RETAINED

EARNINGS
ASSETS = LIABILITIES + COMMON STOCK - DIVIDENDS + REVENUES –
EXPENSES

• TRANSACTION ANALYSIS
o External Transactions are exchanges of value between two entities which
yield changes in the accounting equation
o Internal Transactions are exchanges within an entity
o Events refer to happenings that affect an entity’s accounting equation and
can be reliably measured
• INCOME STATEMENT provides information about revenues (left) and expenses
(right), and provides a net income/loss (bottom); stockholders’ investments and
dividends are not part of income
• STATEMENT OF RETAINED EARNINGS reports information about how retained
earnings changes over the reporting period
• BALANCE SHEET refers to the financial condition of the business at the close of
business at the end of the month/year; shows assets (left), liabilities (upper right),
and equity (underneath); combines retained earnings with common stock along
with liabilities to get total liabilities and equity