Essays/Short Answers (5)

Accounting

1

System for recognizing, organizing, analyzing,

and reporting information about the financial

transactions that affect an organization

Accounting: How it’s Used

2

 Used by:

 Managers

 Stockholders

 Employees

 Creditors

 Suppliers

 Government agencies

 Done by:

 Public accountants

 Management accountants

• Internal auditors

 Government accountants

Financial Accounting

￭ Addresses external stakeholders’ needs

￭ Generally accepted accounting principles (GAAP): Guide the practice of financial accounting

￭ Financial Accounting Standards Board (FASB): Organization that the Securities Exchange Commission

has delegated authority to develop rules

3

Accounting Principles: Objectives

￭ Ensures financial statements are:

 Relevant

 Reliable

 Consistent

 Comparable

4

Financial Statements

5

Balance sheet

Income statement

Statement of cash flows

Balance Sheet

￭ Summarizes a firm’s financial position at a specific point in time

 Accounting equation

Assets = Liabilities + Owners’ Equity

￭ Assets: Things of value a firm owns

￭ Liabilities: Indicate what the firm owes to non-owners

￭ Owners’ equity: Claims the owners have

6

Income Statement or Profit and Loss Statement

￭ Summarizes the financial results of a firm’s operations over a given period of time

 Revenue − Expenses = Net Income

￭ Revenue: Increase in the amount of cash and other assets the firm earns in a given time

period

7

Income Statement or Profit and Loss Statement

 Accrual-basis accounting: Revenues are

recorded when they are earned

￭ Expenses: Assets a firm uses, to carry out the business activities necessary to generate its revenue

￭ Net income: Profit or loss the firm earns in the time period covered by the income statement

8

Statement of Cash Flows

￭ Identifies amount of cash that flowed into and out of the firm from three types of activities

 Operating activities

 Investing activities

 Financing activities

9

OUR Income Statements

10

OUR Balance Sheets

11

OUR Statements Of Cash Flow

12

Other Statements

13

• Shows how retained earnings have changed from one accounting period to the next

Statement of Retained Earnings

• Shows how net income and dividends affect retained earnings

Stockholders’ Equity Statement

Comparison of Financial and Managerial Accounting

14

Financial Accounting Managerial Accounting

Purpose • Provide information to

external stakeholders

• Information provided is

available to the general

public

• Provide information to

internal stakeholders

• Information provided is

proprietary

Type of

information

presented

• Focuses almost exclusively on

financial information

• Provides both financial and

nonfinancial information

Nature of

reports

• Prepares a standard set of

financial statements

• Prepares customized

reports to deal with specific

problems or issues

Comparison of Financial and Managerial Accounting

15

Financial Accounting Managerial Accounting

Timing of

reports

• Presents financial

statements on a

predetermined schedule

• Quarterly or annually

• Creates reports upon

request by management

Adherence to

accounting

standards

• Governed by a set of

accepted accounting

principles

• Uses procedures developed

internally

Time period

focus

• Summarizes past

performance and its

impact on the firm’s

present conditions

• Provides reports dealing

with past performance

• Involves making projections

about the future when

dealing with planning issues