Chapter 1: Financial Accounting PDF

Chapter 1: Financial Accounting Dr. Yurko tock...

Chapter 1: Financial Accounting Dr. Yurko tock wips legal TYPES OF ENTITIES: owners separate entity ↓ Eat don't If You follow by-laws people Can the Slip through CorporateVeil. board > Elect =- - of directors Shareholders d SOLE PROPRIETORSHIP PARTNERSHIP CORPORATION Hire people A business owned by one person A voluntary association of two or more A separate legal entity like Executives The most common form of business persons for the purpose of conducting a The owners of the corporation are the COO business CEO ,CFO , , stockholders V P Pres Cto ,. , ADVANTAGES DISADVANTAGES ADVANTAGES DISADVANTAGES ADVANTAGES DISADVANTAGES to manage Easy to Form Unlimited Liability Semi-Easy to Form Generally – Legal Protection – Formalities – everyday tasks. Unlimited Liability Limited Liability minutes/bylaws/etc Companies No Double-Tax Complex Transfer No Double-Tax Separate Tax Return Easier to Raise Separate Tax Return (private capital have artic different laws No Separate Tax Broader Skill Set Easier to Transfer Double-Tax companies). Return Owner Control Broader Skill Set In addition, there are “Limited Liability” companies/partnerships. 1  / correct Revenue $1000 A clos Chapter 1: Financial Accounting Expense $1250) Dr. Yurko publiclyTraded $1750) $ Companies Net Income GENERAL CORPORATE STRUCTURE bellow Listed SHAREHOLDERS elect→ ↳ FASB created SEC : ↳ Listed bellow BOARD OF DIRECTORS hire→ (Chairman of the Board & Directors) and fors Public Firms have Audit Committees and Compensation Committees Inves require be BankS and Ardited. GAAP OFFICERS run the company (CEO, CFO, COO, CTO) ↑ T d hire CONSEQUENTLY: Owners can be different from those that run the company, particularly at publicly traded companies companies Audit own their. WHO NEEDS TO KNOW A FIRM’s ACCOUNTING INFO? people d have a Internal Users: Management/The Controller - to make informed decisions to run the business External Users: Investors/Creditors/Regulators – to make informed decisions in regards to investing/lending/compliance. Auditorset run have to first Chairman. that they Joe Kennedy &. market follow. TO help ensure that the information is reliable: - companies sold on public →U.S. Securities and Exchange Commission (SEC) – regulates public stock markets (interstate sale of stocks and bonds) t →Financial Accounting Standards Board (FASB) – provides “Generally Accepted Accounting Principles” (GAAP) Consistency is important (standardization!) because many different players rely on the statements. Emportan →Public Company Accounting Oversight Board (PCAOB) – provides “Generally Accepted Auditing Standards” (GAAS) Important because companies hire their own auditors. IMPORTANT POINT: There are different rules for Private versus Public Firms INTERNATIONAL: Int’l Acctg Standards Board (IASB), Int’l Financial Reporting Standards (IFRS) 2  Chapter 1: Financial Accounting Dr. Yurko The character of ownership motivates accounting rules and makes accounting so important. Particularly because ownership ≠ management – we need RULES OBJECTIVE OF FINANCIAL REPORTING: useful, efficient summary of firm’s financial information to inform and help predict future performance – DECISION USEFULNESS! the Consistently Calculated (all follow the same reporting rules) AIR on Caution Presented Effectively (SHORT! – and to the point) M , important Available Timely (old numbers are useless) Side of whata? Don't over State Income Don't our state assets. CONSERVATISM: ___________________________________________________________. & Focus on numbers that matter MATERIALITY: _____________________________________________________________ : Is it worth it. COST-BENEFIT ANALYSIS: _____________________________________________________ Statement Income This is a perfectStatemen ] 1st , 2023 Aug last year Old by Through 1St nothing , August Food statement S July 31 , 2024 2024 is north 3 Immediately a. lot Chapter 1: Financial Accounting Dr. Yurko CHARACTERISTICS: Relevant, Faithful Representation (complete, neutral, accurate), Comparable, Verifiable, Timely, Understandable, and guided by Cost-Benefit Assessment in consideration of Materiality Concepts Principles 1. Accounting/Economic entity 1. Historic Cost principle. Not be listed Company of Shareholder What you paid for it must activities Companies the what it is worth now , owners activities are not Didn'te ] 2. Accounting period/Periodicity that 2. Revenue recognition What happens in that year is only in. that time period year. Only happens in do glass 3. Monetary unit 3. Expense recognition (matching) used. in What currency is being 4. Going concern/Continuity Assumption 4. Full disclosure assumption. Business is going to continue to operate They think this company has a risk of going under. ↓ Stock, Very serious maneuver 4  Lenders Liability, When you Chapter 1: Financial Accounting Borrow (DeB play borrow you interest Dr. Yurko test Bare risitoe and : This is expense $ an Stock & Three Types of Business Activities d holders. Givl & FINANCING need $$$ to operate INVESTING need “stuff” to operate OPERATING equity. INVESTORS equity CREDITORS no equity property, plant and equipment (PPE) The everyday business of buying-and- return In ways to no required Firms buy and sell PPE (e.g., truck, ownership. get return regular payments selling a product/providing services, and all for payments buildings) even if they are in the business ↓ supporting activities dividends – interest – of buying and selling something else Price 1 Stock (e.g. , pizza, clothes, coffee) (e.g., utilities, inventory purchases).. nontax deductible tax deductible Increases. Paying a divided (fine Cash to investors) 2 ↳ Things needed to have ↳ sales reveive , d DEFINE AS FINANCING – INVESTING – OPERATING: a functional business. Salaries. Utilities operating , ,Financing 1. Pay Salaries _______________________ Not assets Long-Lived an Supplies Rent , expense 2. Borrow money from a bank _________________ , Financing 3. Issue Common Stock ___________________ Investing 4. Purchase Equipment ____________________ Interest is Investing 5. Purchase Inventory _______________________ Investing 6. Sell Inventory ______________________ an operating expense Investing. 7. Buy Land ______________________ ? Financing 8. Repay the Bank Loan (Principal) ________________________ operating 9. Repay the Bank Loan (Interest) ________________________ Investing 10. Sell Equipment ______________________ Fin a 11. Distribute Dividend to Shareholders _______________________ 12. Pay rent ____________________________ 5  Chapter 1: Financial Accounting Dr. Yurko company Name THE ACCOUNTING PROCESS: (1) IDENTIFY economic activity; (2) QUANTIFY; (3) RECORD; (4) ADJUST at end of year; and (5) REPORT STEP 5: REPORT - The Financial Statements Balance Sheet 1st – The Income Statement reports activity (revenues & expenses) for a given period of time. REVENUES /GAINS increase Stockholders Equity, EXPENSES / LOSSES decrease Stockholders Equity 12 3123. : - had top what You company name at. fells you time. year ended 12 31 23.. at one specific Revenues and expenses that time Assets (Have) that happened during Liabilities (Owe) period. Eavity Stockholder Revenue L + SE - - Expenses A = to ↑ need Net Income assets always ↓ stock equal liabilities to No overlapStatement Calculate Net Income - to then prepare the second statement: Reports the company’s revenues and expenses over an interval of time Income ❑ If revenues > expenses, then net income ❑ If revenues < expenses, then net loss NOTICE: Revenues are reported – not cash received. Flipside, expenses are deducted – not bills paid. 6  Chapter 1: Financial Accounting Dr. Yurko Practice Problem: Frodo, Sam, Merri and Pippin formed “Crispy Bacon, Co.” on January 7 th, 20XX. They each contributed $100,000 of assets. Merri and Pippin contributed cash. Frodo contributed a building and land. Sam contributed farming equipment. Total Dividends paid during 20XX=$80,000. As of Dec 31, 20XX, the following data is available: Cash 422,000 Cash Inflows from Investors 200,000 Accounts Receivable 32,500 Cash Inflows from Creditors 22,500 Equipment 130,000 Cash Receipts from Sales 518,000 Building and Land 100,000 Cash Disbursements from Operations 208,500 Total Revenues 550,500 Cash Outflow for Equipment Purchase 30,000 Salaries Expense 135,000 Utilities Expense 50,000 Misc Expenses 98,500 Accounts Payable 75,000 Note Payable 22,500 Common Stock 400,000 Dividend 80,000 Prepare the INCOME STATEMENT for Crispy Bacon, Co. for its first year of operations: 1St - Income Statement year - Revenue Types 7 (Expenses) - - Income Net Assets Liabilities Dividends *For this upside-down universe, there is no depreciation expense or any additional adjusting entries, discussed in future chapters. 7 Chapter 1: Financial Accounting Dr. Yurko 2nd–The Statement of Stockholders’ Equity reports changes to contributed capital (e.g.Common Stock) and retained capital (Retained Earnings). Calculate the End of the Year Stockholders’ Equity Account Balances – particularly Retained Earnings – to prepare 3rd Statement Contributions -versus- Internally Generated by Business Activity 8 = =E-B Chapter 1: Financial Accounting BNI-D = E Dr. Yurko Prepare the STATEMENT OF STOCKHOLDERS’ EQUITY for Crispy Bacon, Co. for its first year of operations: Retained Earnings St. SH) Year Ea stock Beg. common ↓ Net Income. 20 - DiV , 000 - Beginning End RIssue Stock 1 , 000 000 of year24 , gend 9  (L SE) Chapter 1: Financial Accounting Dr. Yurko A = + 3rd – The Balance Sheet reports the firm’s financial position at a given point in time, a “snap shot” of assets, liabilities, and equity. THE ACCOUNTING EQUATION: Assets = Liabilities + Stockholders’ Equity ASSETS (RESOURCES) = LIABILITIES + EQUITY what the firm has = what the firm owes + ~Shareholder’s “Value” Contributed Capital + Retained Earnings (Common Stock) (Preferred Stock) 10  A= LtSE, Chapter 1: Financial Accounting A= L + CStRE Alcouts Prepare the BALANCE SHEET for Crispy Bacon, Co. for its first year of operations: