Chapter 1 Notes

Types of Accountants

1. Public Accounting
• Assurance Services (includes Auditing)
• Tax
• Management advisory services (consulting)
2. Private/Industry (working for a particular business)
3. Governmental/Not-for-profit accounting

Accounting- ________________________________________________________________________

Measures --> Processes --> Communicates

Accounting communicates results to decision makers through the_____________ ______________.

The primary role of accounting is to report and provide information to decision makers.

Accounting is the language of business.

Financial vs. Managerial Accounting

Financial Accounting: provides information for _____________ users.

Vs
Managerial Accounting: provides information to _____________ users.

Accounting Rules:
U.S.A International Standards

Securities Exchange Commission (SEC)

Financial Accounting Standards Board (FASB) Int’l Accounting Standards Board (IASB)

Generally Accepted Accounting Principles (GAAP) Int’l Financial Reporting Standards (IFRS)

Accounting guidelines are called ________________________________________ ( ) governed

by the Financial Accounting Standards Board (FASB). Financial statements in the United States are
prepared using GAAP.

Many countries around the world prepare financial statements using a framework called

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International Financial Reporting Standards (______) governed by the International Accounting
Standards Board (IASB).

The goal of financial reporting is to provide information that is __________ ___ _____________.
Information should be relevant and reliable (have faithful representation).

Accounting Assumptions and Principles

Monetary unit assumption: Business events and transactions are recorded in terms of money. It
also assumes that monetary units are of equal worth, inflation and deflation are ignored (assumes
stability)

___________________________________: assets are recorded and carried in accounting records at

their actual (acquisition) cost; cost is not adjusted for changes in market value or replacement costs

General rule: report assets at cost/book value (discussed in Chapter 3)

Cost
-Accumulated Depreciation
=Book Value

Going-concern assumption: It is assumed that each enterprise will continue operating indefinitely

Economic entity assumption: For accounting purposes, each enterprise is assumed to be, and
treated as, an entity separate and distinct from its owners, whether or not this is legally true

4 Business Structures (Economic Entity):

1. ____________________:
a. No special requirements to get started
b. Owned by 1 person

2. ____________________:
a. A written agreement is not required, but best to have one.
b. Owned by 2 or more people

3. ____________________:
a. Separate legal entity that can be public or private
b. Owned stockholders
c. Earnings may be subject to double taxation

4. _____________________________:
a. For tax purposes similar to partnership or proprietorship (hybrid)
b. Legal/Liability purposes: similar to a corporation

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 Things to consider when forming a business:

1. _____________________________________________________________________________

2. _____________________________________________________________________________

3. _____________________________________________________________________________

4. _____________________________________________________________________________

The Accounting Equation = ALE (Like the drink!)

The financial statements are based on the basic tool of accounting, the accounting equation:

Assets Liabilities + Stockholders’ Equity

(Economic Resources) = (Claims to Economic Resources)

Contributed Capital + Retained Earnings

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Assets: -________________________________________________________________

-________________________________________________________________

-Examples:________________________________________________________

Liabilities: -________________________________________________________________

-________________________________________________________________

-Examples:________________________________________________________

Equity: -________________________________________________________________

Increases result from:_______________________________________________

Increases result from:_______________________________________________

Equity = Owners’ Equity = Stockholders’ Equity (We will use the terms interchangeably)

Assets
- Liabilities
= Equity

Equity consists of 2 components:

1. _______________________________________________________________________

2. _______________________________________________________________________

Transactions:
A transaction is any event that affects the ____________ position of a business that can be measured.

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 Assets Liabilities Stockholders' Equity

+ + + = + - + -

End Bal.

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 4 basic financial statements:

1. Income Statement: “Statement of Operations”

Includes: Revenues, Expenses, Gains, Losses; Shows net income or net loss

Best financial statement to evaluate profitability; statement of performance

Formula: ___________________________

2. Statement of Retained Earnings (RE):

Shows earnings kept in the business vs. earnings distributed

Statement of owner’s equity; RE = earnings

Formula: ___________________________

3. Balance Sheet: “Statement of Financial Position”

Includes Assets, Liabilities, Stockholders’ Equity

Best financial statement to evaluate financial condition

Formula: ___________________________

4. Statement of Cash Flows:

Shows where cash came from and where cash went

Will discuss in more detail later in the semester

Formula: ___________________________

Must be prepared in this order:

I Study Really Early Before Cramming Fast

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 Chapter 1 Text Examples

1. Owner Contribution
Sheena Bright contributes $30,000 cash to Smart Touch Learning, a corporation, in exchange
for stock.

2. Purchase of Land for Cash

Smart Touch Learning purchases land for an office location, paying cash of $20,000.

3. Purchase of Office Supplies on Account

Smart Touch Learning buys office supplies on account agreeing to pay $500 within 30 days.

4. Earning of Service Revenue for Cash

Smart Touch Learning earns service revenue by providing training services for clients. The
business collects $5,500 revenue in cash.

5. Earning of Service Revenue on Account

Smart Touch Learning performs a service for clients who do not pay immediately. The clients
promise to pay $3,000 within one month.

6. Payment of Expenses with Cash

Smart Touch Learning pays $3,200 in cash expenses: $2,000 for office rent and $1,200 for
employee salaries.

7. Payment on Account (Accounts Payable)

Smart Touch Learning pays $300 to the store from which it purchased office supplies in
Transaction 3.

8. Collection on Account (Accounts Receivable)

Smart Touch Learning now collects $2,000 from the client from Transaction 5.

9. Payment of Cash Dividend

Smart Touch Learning distributes a $5,000 cash dividend to the stockholder, Sheena Bright.