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Ch 1-6 summaries - Chapter 1: Financial Statements and...

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Chapter 1: Financial Statements and Business DecisionsAccounting SystemsoTwo groups of decision makers – internal and external.oFinancial accounting focused on external decision makersoManagerial accounting focused on internal decision makersFour basic financial statements and the footnotes to those financial statementsoBalance sheet:Fundamental Accounting EquationAssets = Liabilities + Stockholders EquityAssets – economic resources owned by a companyLiabilities – debts or obligations that a firm has to other partiesStockholders’ Equity—Financing provided by owners of thebusiness concept of limited liabilityoIncome Statement:Revenues – Expenses = Net IncomeRevenues – generated by sales of goods or services to customers.Expenses – costs incurred by an entity to earn revenues, i.e., costof food, utilities and salaries.Matching -- expenses are recorded in the same period asthe related revenue regardless of when they are paid.Net Income or net earningsoStatement of Stockholders’ Equity:Reconciles opening balances to ending balances including retainedearnings:Beginning Retained Earnings + Net Income – Dividends = Ending Retained EarningsDividends = Earnings (net income) paid to shareholders in cash.oStatement of Cash Flow—reports the cash inflows and outflows over aperiod of time. Activities are classified into one of three categories:Operating activities – cash flows directly related to earning income.Investing activities – cash flows related to the acquisition or sale ofproductive assets.Financing activities – cash flows related to financing the entity, i.e.,transactions with creditors or investors.
Chapter 2: Investing and Financing Decisions and the Balance SheetAccounting Theory:1.Qualities the make accounting information more usefula.Relevanceb.Faithful Representation2.Assumptions underlying accounting measurementa.Separate entity assumptionb.Unit of measurec.Going concern assumptiond.Periodicity3.Elements of the Balance Sheeta.Assets – economic resources with probable future benefits owned orcontrolled by the entity as a result of past transactions.a.i.Measured initially at acquisition cost (historical cost principle)a.ii.Equals fair market value at acquisitiona.iii.Listed on the balance sheet in order of liquidity – how long will ittake to be converted into casha.iv.Two broad categories:a.iv.1.Current assetsa.iv.2.Long-term assetsb.Liabilities – probable obligations that result from past transaction that willbe settled with cash or by providing servicesb.i.Listed on the balance sheet in order of liquidityb.ii.Two broad categories:b.ii.1.Current liabilitiesb.ii.2.Long-term liabilitiesc.Stockholders’ Equity – financing provided by ownersc.i.Contributed capital: Owners invest cash or other assetsc.ii.Retained Earnings: Earnings retained to operate the business—notpaid out as dividendsAccounting Process/Transaction Analysis:1.Step One - Determine which events should we recognize:a.

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Term
Spring
Professor
AlyssaGonnerman
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