ACG2021 Chapter 1 Notes

ACG2021 Chapter 1 Notes - ACG2021 Chapter 1 Notes 1 In this...

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ACG2021 Chapter 1 Notes 1. In this class, we are focused on developing and understanding financial statements for public companies that are used by external decision makers who have a stake in the company itself. These external decision makers are made up of creditors and shareholders Creditors – People that loan money to companies Shareholders – People that have a direct ownership stake in the company through the purchase of stock/equity 2. The rules for financial accounting, known as Generally Accepted Accounting Principles (GAAP) , are created by a private entity known as the Financial Accounting Standards Board (FASB) , which is primarily made up of members in the accounting profession itself. The Securities and Exchange Commission (SEC), a federal government entity, is given legal authority to create GAAP through the 1933 and 1934 Securities Acts; however, they have ultimately assigned this task to the FASB, who to this day creates GAAP for financial reporting. 3. The Fundamental Accounting Equation Assets – Liabilities = Stockholder’s Equity . Why does this make sense in terms of the business and for presenting the financial statements? If we rearrange the equation to Assets = Liabilities + Stockholder’s Equity, we can answer this question more easily. Companies obtain financing (money) through two sources : 1. By Issuing DEBT – This means, a company will issue bonds to investors. By issuing bonds to investors, the company receives a specified sum of money based upon the amount of the bond, and over time, the company pays the investor interest as a bonus for “giving money” to the company, as well as the original amount received by the company from the investor. In addition to issuing bonds, companies may also borrow money from financial institutions such as banks or mortgage companies. 2. By Issuing STOCK (Equity) – This means that a company will issue shares of its stock that investors then purchase for a specified market price. The proceeds from the sale of the shares of stock go to the company. Investors in this scenario then have an “ownership stake” in the company. Companies use the proceeds obtained by issuing debt or equity to purchase assets
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ACG2021 Chapter 1 Notes - ACG2021 Chapter 1 Notes 1 In this...

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