Framework for financial accountingInvestors/Creditors make decisions about the company - company activities measuredby accountants - accountants send info to investors/creditors.Financial Accounting refers to the accounting information conveyed to external users (investors/creditors)Two Functions of FA: Measure business activities and communicate those to external users for decision-makingBusiness structures:A.Corporations : Legally separate from stockholders (limited liability). One disadvantage: Double taxationB.Sole proprietorship : one owner (no LL)C.Partnership : 2 or more people (no LL)Business Activities –A.Financial activities: Transactions company has with External usersB.Investing activities: Purchase and sale of resourcesC.Operating activities: Primary operations of the companyThe Accounting Equation: ASSETS (Resources) = LIABILITIES (Creditor’s claim to resources) + Stockholder’s Equity(Owner’s claims)Expense Recognition: AKA matching principle; any costs used to make revenue are recorded as expensesNet Income= Revenues – ExpensesFinancial statements include : KEY component of the company’s annual report!
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