Principles of Financial Accounting

Chapter 1

Forms of Business Organizations Sole Proprietorship

Easy to establish Owner is control of assets and

operations Tax advantages

Partnership Easy to establish Broader skills and resources Tax advantages

Forms of Business Organizations (cont) Corporations

Easier to transfer ownership Easier to raise capital No personal liability beyond

investment

Definition of Accounting Provides information for decision

making. An information system that

identifies, records, and communicates the economic events of an organization to interested users.

Users of Accounting information Internal Users

Management External Users

Investors Creditors Tax authorities Regulatory agencies Competitors Customers, labor unions

Types of Business Activities Financing Activities

Sale of stock (ownership) Dividends

Borrowed funds Loans Bonds

Types of Business activities (cont) Investment Activities

Purchases of Property, Plant & Equiment Operating Activities

Revenues An increase in assets arising from the sale of

a product or performance of a service. Expenses

The cost of assets consumed or services used in the process of generating revenues.

Financial Statements Income Statement

Revenues – Expenses = Net income Income statement covers only a

specified period of time. Statement of Retained Earnings

Reflects the beginning RE balance plus net earnings for the period minus dividends paid during the period.

Financial Statements (cont) Balance Sheet

Lists assets, liabilities, and owner’s equity at a specific date.

Statement of Cash Flows Provides information regarding the

cash receipts and cash payments during a period of time.

Financial Statement (cont) Notes to the financial statements

Provides additional disclosures regarding

Valuation methods for inventory, depr., etc. Liabilities and other obligations Possible lawsuit losses, pension obligations

Auditor’s Report An unqualified opinion should lend

confidence to the numbers in the financial statements.

GAAP Monetary Unit Assumption Economic Entity Assumption Time Period Assumption Going Concern Assumption Cost Principle Full Disclosure Principle

Assignment ALL Brief Exercises starting on

page 33 E1-4 Part (a) only page 35 E1-10 page 37 BYP1-1 page 42 BYP1-10 page 45