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Chapter_1 - Introduction to Accounting and Business Chapter...

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Unformatted text preview: Introduction to Accounting and Business Chapter 1 1 "The teaching of accounting is no longer designed to train professional accountants only. With the growing complexity of business and the constantly increasing difficulty of the problems of management, it has become essential that everyone who aspires to a position of responsibility should have a knowledge of the fundamental principles of accounting." James O. McKinsey 1929 2 Types of Businesses: Manufacturing changes basic inputs into products that are sold to customers Merchandising purchases products from a manufacturing business and resells them to customers Service provides services (rather than products) to customers 3 Types of Business Organizations: Proprietorship owned by one individual Partnership owned by two or more individuals Corporation organized by state or Federal statues as a separate legal entity that is owned by stockholders 4 Business Stakeholders: Any person or entity that has an economic interest in the performance of the business: Owners Managers / Employees Customers Creditors Governmental Bodies 5 Specialized Accounting Fields Page 1 Financial Accounting primarily concerned with the recording and reporting of economic data and activities for a business (first half of this course) Management Accounting uses financial accounting and estimated data to aid management in running day-to-day operations and in planning future operations (second half of this course) 6 Specialized Accounting Fields Page 2 Taxation preparing various tax returns and tax planning Auditing: External CPA firms that review financial statements for accuracy Internal Employees of a business who review the accounting and operating procedures prescribed by the business 7 Assets, Liabilities, & Owner's Equity Assets resources controlled by a business Liabilities debts of the business owed to creditors Owner's Equity the rights of owners Basic Accounting Equation: Assets = Liabilities + Owner's Equity 8 Business Transaction An economic event that affects the financial condition or the results of operations of a business Can be stated in terms of changes to the Basic Accounting Equation, and therefore, are recorded in the financial accounting system 9 Examples of Assets: Cash Accounts Receivable Supplies Land Buildings Any other items of value controlled by a business 10 Examples of Liabilities: Accounts Payable Salaries Payable Interest Payable Bank Loans Bonds Payable Any other debt owed to a creditor by a business 11 Stockholders' Equity: Capital Stock ownership shares in a corporation Retained Earnings undistributed net income of a corporation 12 Stockholders' Equity is Increased by: The corporation's selling of shares of Capital Stock Earning Revenues: Increases in assets (usually cash or accounts receivable) as a result of the Corporation's selling its product or providing its services 13 Stockholders' Equity is Decreased by: Incurring Expenses: The using up of assets to produce revenues Paying Dividends 14 Financial Statements of a Corporation: Income Statement Statement of Retained Earnings Balance Sheet Statement of Cash Flows 15 Income Statement: A summary of the revenues and expenses of a business for a period of time Shows the net income or loss for the specified period of time Net Income = Revenues Expenses 16 Statement of Retained Earnings: A summary of Retained Earnings for a period of time Ending Balance of Retained Earnings = Beginning Balance of Retained Earnings + Net Income for the period - Dividends 17 Balance Sheet: Lists the Assets, Liabilities, and Stockholders' Equity for a point in time Based on the Basic Accounting Equation 18 Statement of Cash Flows: Reconciles the corporation's beginning cash balance with it's ending cash balance. Summarizes cash receipts and cash payments by: Operating Activities Investing Activities Financing Activities 19 ...
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