Introduces the four financial statements–Income Statement, Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows. Accounting as the language of business is discussed along with an introduction of the various users of accounting information. Financial and Managerial accounting are compared. The four ways to organize a business – proprietorship, partnership, limited – liability company, and corporation, are discussed. An introduction and contrast of the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) is done.
The Entity Assumption, Continuity (Going Concern) Assumption, Historical Cost Principle, and Stable – Monetary – Unit Assumption are explained. The accounting equation – Assets = Liabilities + Stockholder’s Equity is presented along with definitions and explanations of each component of the equation. A detail presentation of each of the four previously mentioned financial statements is given. Each account classification of the financial statements – assets, liabilities, stockholder’s equity, revenue, and expenses are thoroughly explained and examples of common account titles used are given.
The process of evaluating a company through the use of the financial statements is shown. A discussion of business ethics in accounting decisions is done. An end of chapter summary problem emphasizes the preparation as well as understanding of the financial statements. An accounting vocabulary section explains all the new accounting terms. The End of Chapter Access Your Progress allows the student to determine how well he grasped the information presented in the chapter. Traditional exercises and problems solidify the student’s understanding of the material. Teaching Outline . Define a. Financial Accounting b. Managerial Accounting c. Contrast Financial and Managerial Accounting 2. Describe the users of financial information: a. Individuals b. Business Managers c. Investors d. Creditors e. Government Regulatory Agencies f. Taxing Authorities g. Nonprofit Organizations h. Other Organizations 3. Explain a. Financial Accounting Standards Board (FASB) i. Generally Accepted Accounting Principles (GAAP) b. International Accounting Standards Board (IASB) i. International Financial Reporting Standards (IFRS) c. Compare GAAP and IFRS 4.
Define and discuss Accounting Principles, Assumptions and Concepts a. Entity Assumption b. Continuity (Going Concern) Assumption c. Historical Cost Principle d. Stable Monetary Unit Assumption 5. Introduce the Accounting Equation a. Define and discuss common account titles: i. Assets ii. Liabilities iii. Stockholder’s Equity b. Define and discuss common account titles; i. Revenue ii. Expense iii. Retained Earnings c. Discuss Paid in Capital and Dividends 6. Explain and Prepare the Financial Statements a. Income Statement b. Statements of Retained Earnings c. Balance Sheet d.
Statement of Cash Flows 7. Use Financial Statements to evaluate business performance a. Explain the relationship among the financial statements 8. Ethics in Business and Accounting Decisions a. The role of judgment in making decisions b. Economic factors c. Legal factors d. Ethical factors Key Topics The financial statements are actually reports on how well or poorly a business performed during a specified period of time. Chapter one actually presents the four basic financial statements and other relevant information that is needed to adequately prepare the financial statements.
First one must understand that the Financial Accounting Standards Board (FASB) develops the rules and guidelines in the United States that must be adhered to in preparing the financial statements. These guidelines are known as the generally accepted accounting principles (GAAP). The International Accounting Standards Board (IASB) develops the international financial reporting standards (IFRS) which are the international or global standards. Exhibit 1-3 gives an overview of the joint conceptual framework of accounting developed by the FASB and the IASB.
However, the SEC announced that it will soon require all American companies to adopt the IFRS. This adoption is currently slated to begin the initial phase in 2014 with all companies on board by 2016. The adoption of the IFRS by all American companies will facilitate the process of comparing financial statements of like industries globally. Also, it will eliminate the need of many companies to prepare several sets of financial statements. Accounting is often labeled as the language of business and there are external as well as internal users of accounting information.
Individuals, investors and creditors, regulatory bodies as well as nonprofit organizations are just some of the noted users of the accounting information. The accounting information is expected to be accurate as well as timely in order to satisfy the need of the users. There are two different types of accounting that is needed by the users. They are Financial Accounting and Managerial Accounting. Financial Accounting primarily provides information to the external users and managerial primarily serves the internal users. This information is used in each and every type of business organization.
There is the sole proprietorship, partnership, limited liability company, and the corporation. Each of these businesses differs as far as the form of ownership and other accounting details however, each is dependent on accurate and timely information in order to operate at the optimum level. There are some key accounting principles, assumptions, and concepts used in adequately preparing the accounting records. The first one discussed in this chapter is the assumption entity. This is the underlying assumption, which can be taken by the users of the financial statements, that a business is a separate economic entity.
Each business is treated as a separate and distinct entity to enable the accountant to adequately measure the financial performance of the business. The Continuity (Going Concern) Assumption is also discussed here. This is the assumption that the business will continue to exist long enough to use the existing assets for their intended purpose. If the business does intend to continue to operate and employ the assets as intended, it does not have to be disclosed in the financial statements. However, if there is an intention not to continue to operate it must be disclosed somewhere in the financial statements.
The Historical Cost Principle is presented such that one will understand that actual cost is used as the valuing system for all accounting transactions. Actual cost is verifiable as well as unbiased and therefore used to insure that the accounting records are prepared in a relevant as well as reliable manner. The Stable Monetary Unit Assumption is also presented in this chapter. This is the assumption that the purchase power of a dollar does not fluctuate. That is, one can purchase the same amount with a dollar today that he/she could a year ago.
This assumption allows the accountant to ignore inflation and add or subtract dollars from varying years without adjusting for inflation. This is sometimes difficult for students to understand because they have seen inflation as well as lagging economies however, the professor can assure the student that if needed there is a system developed to reliably compare statements from varying years. That system, however, is taught in upper level accounting courses. After developing an understanding of this material the student is then introduced to the Accounting Equation.
That is: Assets = Liabilities + Owners’ Equity. It is imperative that the student understand the importance that this equation plays in preparing the financial statements. This equation presents the resources of a company as well as the claims on those resources. One must also note that this equation must be kept in balance at all times. Assets are presented as economic resources of the entity that are expected to be of future benefit. These resources have two types of claims against them: liabilities – outside claims and owners’ equity – insider claims.
See exhibit 1-4 to help present the fact that the two sides must equal. The influence on stockholders’ equity by, paid-in capital, and retained earnings must be explained. Also, the manner in which revenue, expenses and dividends effect retained earnings should be explained. Remember to stress that dividends do not affect net income. They are not subtracted from revenue to determine the net income. Rather, they are subtracted from retained earnings. The financial statements are now to be presented.
The Income Statement is the also referred to as the statement of operations because it measures the operating performance. It reports the revenues earned as well as the expenses incurred during a specified period of time. The expenses are subtracted from the revenue to determine the net income/loss for the accounting period. Net income is said to be the single most important item in the financial statements. The Statement of Retained Earnings is prepared after the Income Statement because the net income/loss from the Income Statement is needed to prepare the Statement of Retained Earnings.
Retained earnings are simply the portion of the net income that the company has kept in the business. The Statement of Retained Earnings shows the changes that occurred in the retained earnings during the accounting period. Be sure to note that the net income is added to the beginning retained earning balance and the dividends are subtracted in order to determine the ending retained earnings balance. The Balance Sheet is prepared after the Statement of Retained Earnings because the ending retained earnings balance is needed to prepare the Balance Sheet.
Statement of Financial Position is another name given to the Balance Sheet because it actually measures the financial position of a company. This statement reports on the assets, liabilities, and stockholders’ equity of a company. A good way to help the students understand the information given by the Balance Sheet is to tell them that it gives a quick snapshot view of the financial status of the company on one day. That day is generally the end of the accounting period. The sum of the assets is expected to equal the sum of the liabilities and the stockholders’ equity. See exhibit 1-9.
The Statement of Cash Flow measures the cash receipts and payments. This statement reports on cash flows from three major activities: operating activities, investing activities, and financing activities. The net increase/decrease in cash from these three activities is then determined and added to the beginning cash balance to get the ending cash balance. In the financial statement conclusions it is important make sure the students know the purpose of each financial statement. It is also important that the students know the order of preparation as well as the formulas for each financial statement.
Good business requires decision making, which in turn requires the exercise of good judgment. Making good judgments in business in general and accounting in particular should take into account not only economic, but legal and ethical dimensions as well. The last section of the chapter presents an ethical decision making model that is used consistently throughout the rest of the book. Use of the model emphasizes that good decisions are not always based just on the basis of how much money a company can make immediately.