Financial accounting the impact on decision makers 9e chapter 1

Chapter 1
Accounting as a Form of
Communication


What is Business?
 Consists

of activities necessary to provide
members of society with goods and services

LO 1


Exhibit 1.1—Types of Businesses


Exhibit 1.2—Forms of Organization

LO 2


Business Entities
 An

organization operated to earn a profit
 Sole Proprietorships: organization with a single
owner
 Partnerships: business owned by two or more
individuals
 Often used

by accounting firms and law firms

 Corporations: entity organized under

a particular state
 Ownership

evidenced by shares of stock

the laws of


Nonbusiness Entities
 Organization

operated for some purpose other
than to earn a profit
 Do not have an identifiable owner


Organizations and Social Responsibility
 U.S.

business entities recognize the societal
aspects of their overall mission and have
established programs to meet these
responsibilities

Nature of Business Activity
 Businesses

engage in three types of activities:

Financing

Investing

Operating

Activities

Activities

Activities

• Borrowing
• Sale of stock

• Purchase and
sale of assets

• Sale of
products/services
• Costs incurred
to operate
business
LO 3

Exhibit 1.3—A Model of Business
Activities


What is Accounting?

Economic
Information

Various Users
Management
Stockholders
Creditors
Financial analysts
Government

LO 4


Users of Accounting Information
and Their Needs
 Internal Users:
 Primarily

the managers of a company
 Involved in the daily affairs of the business
 External Users:
 Not

directly involved in the operations of a business
 Need information that differs from that needed by
internal users
 Outsiders must rely on the information presented by
the company’s management


Management Accounting and
Financial Accounting
 Management accounting
 Branch of

accounting concerned with providing
management with information to facilitate planning
and control

 Financial accounting
 Branch of

accounting concerned with the
preparation of financial statements for outsider use


Exhibit 1.4—Users of Accounting
Information


Financial Decision Framework
1.
2.

3.
4.
5.

Formulate the question
Gather information from the financial
statements and other sources
Analyze the information gathered
Make the decision
Monitor your decision


The Accounting Equation
 Assets

= Liabilities + Owners’ Equity
 Left side: valuable economic resources and that
will provide future benefit to the company
 Right side: indicates who provided, or has a
claim to, the assets
 Stockholders’ equity or shareholders’ equity:
used to refer to the owners’ equity of a
corporation
LO 5


Source of Stockholders’ Equity
 Created

when a company issues stock to an

investor
 Retained earnings

 Earnings accumulated or

retained by the company
 Part of owners’ equity that represents the income
earned less dividends paid over the life of an entity


The Balance Sheet
 Financial

statement that summarizes the assets,
liabilities, and owners’ equity at a specific point
in time
 At any point in time, assets must equal liabilities
and owners’ equity


Example 1.4—Preparing a Balance
Sheet


The Income Statement
 Summarizes

the revenues and expenses of a
company for a period of time

EXHIBIT 1.5—The Relationship Between the
Accounting Equation and the Balance Sheet


Example 1.5—Preparing an Income
Statement


The Statement of Retained Earnings
 Summarizes

the income earned and dividends
paid over the life of a business
 Dividends: Distribution of the net income of a
business to its owners


Example 1.6—Preparing a Statement of
Retained Earnings


The Statement of Cash Flows
 Summarizes

a company’s cash receipts and cash
payments during the period from operating,
investing, and financing activities

Example 1.7—Preparing a Statement of
Cash Flows