Chapter 1 331

Chapter 1 331 - Lecture Notes for Chapter 1 (ACCT 331)...

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Lecture Notes for Chapter 1 (ACCT 331) Lecture Notes for Chapter 1 (ACCT 331) Structure of Financial Accounting Accounting: The process of identifying , measuring and communicating economic (financial) information about an organization to interested parties. Financial Accounting: The process of identifying, measuring and communicating economic (financial) information about a company , primarily to investors and creditors (existing or potential). - deals with publicly traded companies. - Information is processed primarily for investors and creditors. Managerial accounting reports detailed information to internal users (managers). Governmental accounting deals with non-profit organizations. Tax accounting deals with reporting to the IRS. Users of Financial Information Means of conveying information to investors: 1 Corporation Investors Suppliers Customers Government Financial intermediaries: financial analysts, brokers, Credit rating agencies Employees / management
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Relevant financial information is provided primarily through financial statements and related disclosure notes. Balance Sheet (Statement of Financial Position) Income Statement (Statement of Earnings / Statement of Operations) Statement of Cash Flows Statement of Shareholders’ Equity The notes to these financial statements. [There are other means such as press releases, websites, proxy statements and other required filings, and direct communication with lenders and investors, but in this course we will focus only on information presented in the financial statements and the notes to these financial statements.] Types of Business Organizations 1. Corporation: a business incorporated under the laws of a particular state. A corporation acquires capital from investors in exchange for ownership interest and by borrowing from creditors. 2. Partnership: unincorporated business owned by two or more persons known as partners. 3. Sole proprietorship: unincorporated business owned by one person. Information Needs of Investors and Creditors 1. Investors look for two sources of possible cash flow: Periodic dividend distributions from the corporation. The ultimate sale of the ownership shares of stock. Example 1 : An investor purchased 100 shares of ABC Mirror, Inc for $10,000 in 2006. At the end of 2006 the investors received $500 dividends from ABC Mirror, and the investor sold the 100 shares during 2007 for $12,000. 2
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2. Creditors lend money to a company for a specific length of time. They hope to gain by charging interest on the money they lend. Example 2: A bank lent $10,000 to ABC Mirror, Inc for one year at an interest rate of 15%. How does an investor choose between alternatives? 1.
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Chapter 1 331 - Lecture Notes for Chapter 1 (ACCT 331)...

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