BA101A Chapter One SG PDF

CHAPTER 1 ACCOUNTING IN BUSINESS Learning Objective C1: Explain the purpose and importance of accounting in the information age. Accounting is an information and measurement system that identifies, records, and communicates relevant, reliable, and comparable information about an organization's busin...

CHAPTER 1 ACCOUNTING IN BUSINESS Learning Objective C1: Explain the purpose and importance of accounting in the information age. Accounting is an information and measurement system that identifies, records, and communicates relevant, reliable, and comparable information about an organization's business activities. It helps assess oppo11unities, products, investments, and social and community responsibilities. Learning Objective C2: Identify users and uses of accounting. Users of accounting are both internal and external. Some users and uses of accounting include (a) managers in controlling, monitoring, and planning; (b) lenders for measuring the risk and return of loans; (c) shareholders for assessing the return and risk of stock; (d) directors for overseeing management; and (e) employees for judging employment opportunities. Learning Objective C3: Identify opportunities in accounting and related fields. Opportunities in accounting include financial, managerial, and tax accounting. They also include accounting-related fields such as lending, consulting, managing, and planning. Learning Objective C4: Explain why ethics are crucial to accounting. The goal of accounting is to provide useful information for decision making. For information to be useful, it must be trusted. This demands ethical behavior in accounting. Learning Objective CS: Explain the meaning of generally accepted accounting principles, and define and apply several key accounting principles. Generally accepted accounting principles are a common set of standards applied by accountants. Accounting principles aid in producing relevant, reliable, and comparable information. The business entity principle means that a business is accounted for separately from its owner(s). The objectivity principle means independent, objective evidence supports the information. The cost principle means financial statements are based on actual costs incurred. The monetary unit principle assumes transactions can be reflected in money terms. The going-concern principle means financial statements assume the business will continue. The revenue recognition principle means revenue is recognized when earned. Study Guide, Chapter J ©The AfcGraw-Hill Companies, Inc., 2007 Learning Obiective C6 (Appendix 1 B): Identify and describe the three major activities in organizations. Organizations carry out three major activities: financing, investing, and operating. Financing is the means used to pay for resources such as land, buildings, and machines. Investing refers to the buying and selling of resources used in acquiring and selling products and services. Operating activities are those necessary for carrying out the organization's plans. Learning Objective A1: Define and interpret the accounting equation and each of its components. The accounting equation is: Assets = Liabilities + Equity. Assets are resources owned by a company. Liabilities are creditors' claims on assets. Equity is the owner's claim on assets (the residual). The expanded accounting equation is: Assets = Liabilities + [Common Stock - Dividends + Revenues Expenses]. Learning Obiective A2: Analyze business transactions using the accounting equation. A transaction is an exchange of economic consideration between two parties. Examples include exchanges of products, services, money, and rights to collect money. Transactions always have at least two effects on one or more components of the accounting equation. This equation is always in balance. Learning Objective A3: Compute and interpret return on assets. Return on assets is computed as net income divided by average assets. For example, if we have an average balance of $100 in a savings account and it earns $5 interest for the year, the return on assets is $5/$100, or 5%. Learning Objective A4 (Appendix 1A): Explain the relation between return and risk. Return refers to income, and risk is the uncertainty about the return we hope to make. All investments involve risk. The lower the risk of an investment, the lower its expected return. Higher risk implies higher, but riskier, expected return. Learning Obiective P1: Identify and prepare basic financial statements and explain how they interrelate. Four financial statements report on an organization's activities: balance sheet, income statement, statement of retained earnings, and statement of cash flows. ©The McGraw-Hill Companies, Inc., 2007 Financial Accounting Fundamentals Notes Chapter Outline I. Importance of Accounting Providing information about what businesses own, what they owe, and how they perform is an important aim of accounting. Accounting is an information and measurement system that identifies, records and communicates relevant, reliable, and comparable information about an organization's business activities. Record keeping, or bookkeeping, which includes just one function of accounting, is the recording of transactions and events, either manually or electronically. Technology is a key part of modern business and has changed the way we store, process, and summarize large masses of data. Technology has allowed accounting to expand to include consulting, planning and other financial services. A. Users of Accounting Information Accounting is the language qf"business because all organizations set up an accounting information system to communicate data to help people make better decisions. I. External information users are not directly involved in running the organization; they include shareholders, lenders, directors, customers, suppliers, regulators, lawyers, brokers, and the press. External users have limited access to an organization's information but they must receive information that is relevant, reliable and comparable. Financial accounting is the area of accounting aimed at serving external users by providing them with ge11eral-pw1wse.fina11cial statements. 2. Internal information users are those directly involved in managing and operating an organization. They use the infonnation to help improve the efficiency and effectiveness of an organization. Managerial accounting is the area of accounting that serves the decision-making needs of internal users. Internal users and the information they require include: a. Research and development managers need data on current and projected costs and revenues to decide whether to pursue or continue research and development projects. b. Purchasing managers need data on quality and quantity of merchandise and materials purchases. c. Human resource managers need data on current payroll costs, employee benefits, performance and compensation. d. Production managers need data on costs and quality of production processes. e. Distribution managers need data on quantity and delivery schedules. f. Marketing managers need data on sales and costs to effectively target consumers and set prices. Study Guide, Chapter 1 ©The McGraw-Hill Companies, Inc., 2007 3 Notes Chapter Outline II. g. Servicing managers need data on warranties and maintenance information to provide a valuable product to its customers. 3. Both internal and external users rely on internal controls to monitor and control company activities. Internal controls are procedures designed to protect company property, ensure reliable reports, promote efficiency, and encourage adherence to company policies. B. Opportunities in Accounting 1. The four broad areas of opportunities in accounting include financial accounting, managerial accounting, taxation, and accounting-related careers. 2. The majority of accounting opportunities are in private accounting. Public accounting offers the next largest number of opportunities while still other opportunities exist in government (and not-for-profit) agencies, including business regulation and investigation of law violations. 3. The professional standing of accounting specialists are denoted by a certificate such as certified public accountant (CPA), certified management accountant (CMA), certified internal auditor (CIA), certified bookkeeper (CB), certified payroll professional (CPP) and personal financial specialist (PFS). Fundamentals of Accounting A. Ethics - A Key Concept Ethics are beliefs that distinguish right from wrong; they are accepted standards of good and bad behavior. l. Ethical behavior is important in all successful organizations. Users must be able to trust accounting information. Good ethics are good business. 2. The AICPA and IMA have set up ethical codes of conduct to be followed. B. Generally Accepted Accounting Principles Financial accounting is governed by rules known as generally accepted accounting principles, GAAP. GAAP aims to make accounting information relevant, reliable and comparable. Two main groups establish GAAP. I. Setting Accounting Principles a. The Financial Accounting Standards Board (FASB) is the private group that sets both broad and specific principles. b. The Securities and Exchange Commission (SEC) is the government group that establishes reporting requirements for companies that issue stock to the public. ©The McGraw-Hill Companies, Inc., 2007 4 Financial Accounting Fundamentals