Chapter 1-3 Summary

Chapter 1-3 Summary - Chapter 1 1 Distinguish operating...

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Chapter 1 1) Distinguish operating, investing and financing activities a) Operating activities include day to day events involved in making and delivering goods and services b) Investing activities involve buying or selling longer term assets such as land and buildings c) Financing activities are related to exchanging money with lenders or owners 2) describe the purpose, setup, and content of the four basic financial statements a) the balance sheet reports what the business owns (reported as assets) at a particular point in time and whether the financing for these assets came from creditors (reported as liabilities ) or stockholders (reported as stockholders’ equity) b) the income statement reports the net amount that a business earned (net income) over a period of time by subtracting the costs of running the business (expenses) from the total amount earned (revenues) c) the statement of retained earnings explains changes in the retained earnings account over a period of time by considering increase (from net income) and decreases (from dividends to stockholders) d) the statement of cash flows explains changes in the cash account over a period of time by reporting inflows and outflows from the business’s operating, investing and financing activities 3) Explains the primary goals of financial statement users a) although the particular interests of the various financial statement users differ somewhat, they ultimately are interested in using the financial statements to i) understand the current state of the business ii) predict how the business is likely to do in the future 4) Describe the importance of ethics and reputation in accounting a) users have confidence in the accuracy of financial statement numbers when the people associated with their preparation and audit have reputations for ethical behavior and competence
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