Hhtfa9e Ch01 Stud

7/17/2019 Hhtfa9e Ch01 Stud

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Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.

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The Financial StatementsChapter 1


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Explain why accounting is the language ofbusiness


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The Language of Business

Measures business activities

Processes data into reports

Communicates results Produces financial statements


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Flow of Accounting Information


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Users of Accounting Information


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Financial Accounting Managerial Accounting

Provides information forexternal users

Investors Creditors

overnment

!he public

Provides information forinternal users " managers

Includes# $udgets

%orecasts

Kinds of Accounting


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Organizing a Business

Proprietorship Partnership LLC Corporation

&wner's( Proprietor )&ne Partners " twoor more

Members *toc+holders" usually

many

Personalliability ofowner's(forbusinessdebts

Proprietor ispersonally liable

Partners arepersonallyliable, limitedpartners arenot

Membersare -&!personallyliable

*toc+holdersare -&!personallyliable


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Proprietorships

*ingle owner

Common business form for small retail stores

and professional service providers Proprietor personally liable for business debts


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Partnerships

!wo or more parties as co)owners

-ot a taxpaying entity

Income passes through to partners overned by an agreement

Mutual agency Each partner can act on behalf of the entity

.nlimited liability Involve ris+

/imited liability partnerships lessen ris+


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LimitedLia!ilit" #ompan" $LL#%

&ne or many owners 'members(

/imited liability

/i+e a partnership0 not a taxpaying entity Income flows through to members

Popular form of business due to combination oftax status and limited liability


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#orporations

&wned by stoc+holders *toc+ represents share of ownership

bility to raise large sums of capital /arger than proprietorship and partnerships

%ormed under state law /egally distinct from its owners


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#orporations

2ouble taxation Corporate income is taxed

*hareholders taxed on distributions of earnings'dividends(

*toc+holders elect $oard of 2irectors *et policy and appoint officers


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Explain and apply underlying accountingconcepts0 assumptions0 and principles


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#onceptual Foundations of

Accounting


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!o provide financial information that is useful to existing investors0lenders0 and other creditors in ma+ing decisions about providing

resources to that entity

3elevance'includes materiality(

%aithfulrepresentation

Comparability 4erifiability !imeliness .nderstandability

Cost

%inancial 3eporting *tandards

&b5ective

%undamental

6ualitativeCharacteris

tics

Constraints

Enhancing6ualitative

Characteristics


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Assumptions & Principles

Entity assumption business is a separate economic unit

Continuity 'going) concern( assumption Entity will continue to exist indefinitely

7istorical cost principle ssets recorded at purchase price

*table monetary unit assumption 2ollar8s purchasing power is stable over time


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International Financial 'eporting

Standards $IF'S% Many countries have own versions of generally

accepted accounting principles 'P(

3eports had to be restated to convert accountingdata from one country to another

I%3* developed and are used by most countriesin the world

.9*9 still follows own P


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International Financial 'eporting

Standards $IF'S% .9*9 P overseen by the *ecurities :

Exchange Commission '*EC(

*EC tentatively set date for .9*9 adoption of I%3*in ;ill ma+e it easier to compare financialstatements across the world

Most common accounting practices similarunder both .9*9 P and I%3*


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Apply the accounting e?uation to businessorgani@ations


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Accounting ()uation (lements


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ssets

/iabilities

&wner8s

e?uity

$ssets % &iabilities ' ()ner*s E+uity


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Assets Liabilities

Cash

Merchandise inventory

Property0 plant0 ande?uipment

ccounts payable

Income taxes payable

/ong)term debt

Assets and Lia!ilities


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Owners* e)uit"

*toc+holders8 e?uity Paid)in capital

3etained earnings

Assets Liabilities Owners Equity


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#orporate Accounting ()uation

ssets /iabilities *toc+holders8 e?uity

Paid)in capital3etainedearnings

mountsstoc+holders

haveinvested

Commonstoc+

mountsearned and

+ept bybusiness

'


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Transactions Affecting 'etained

(arnings


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+et Income

3evenues

Expenses

-et Income

Ifexpenses

exceed

revenues

net lossresults


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$eginning 3etainedEarnings

-et Income'-et /oss(

2ividendsEnding 3etained

Earnings

Expenses

3evenues

,inus

e+uals

Plus or ,inus ,inus e+uals

The #omponents of 'etained

(arnings


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(,ercise --.A

ssets A;B< AD< A1

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Hhtfa9e Ch01 Stud