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- identifies, records,
- and communicates relevant information about a company’s business activities.
- keeping the records of
- the financial affairs of a business.
- aimed mainly at serving
- external users by providing them with financial statements
- serves the
- decision-making needs of internal users (management).
- code of conduct
- by which actions are judged as right or wrong, fair or unfair, honest or
Goal of Accounting
- provide useful information for decision-making.
- For information to be useful, it must be trusted, which demands ethics in
GAAP (Generally Accepted
- rules that
- specify acceptable accounting practices.
Accounting Standards Board)
- – independent
- group of full-time members responsible for setting accounting rules.
SEC (Securities and
- – federal agency Congress has charged to set
- reporting rules for organizations that sell ownership shares to the public
Accounting Standards Board)
- create more harmony among accounting rules worldwide by identifying
- and encouraging the use of the best standards in use.
Principles of Accounting
- Objectivity principle – accounting
- information is supported by independent, unbiased evidence.
- Cost principle – accounting information
- is based on actual cost.
- Going-concern principle – accounting
- information assumes the business will continue operating instead of being
- closed or sold.
- Monetary unit principle – assumes that
- transactions and events can be expressed in money units.
- Revenue recognition principle – revenue
- is recognized (recorded) when earned.
- Matching principle – expenses should be
- recorded in the same period (month) as the revenues they generated.
- Business entity principle – a business is
- accounted for separately from other business entities, including its owner.
Legal forms of business
- Sole proprietorship (proprietorship) – a
- business owned by one person.
- Partnership – a business owned by two or
- more people, called partners.
- Corporation – a business that is a
- separate legal entity under state or federal laws with its owners called
- shareholders or stockholders.
Types of Business
- an act passed by Congress to help curb financial abuses of
- corporations and to better regulate the Public Accountancy profession which
- audits corporations.
Assets = Liabilities +
- Assets – resources owned or controlled by a
Liabilities – creditors’ claims on assets.
Equity – owner’s claim on assets
There are four things that cause Equity to
Assets=Liabilities+Owner Capital-Owner Withdrawals+Revenues-Expenses
- External transactions – exchanges of
- value between two entities, which cause changes in the accounting equation.
- Internal transactions – exchanges within
- an entity, which can also affect the accounting equation.
- Events – happenings that affect an
- entity’s accounting equation and can be reliably measured.
- periodic reports (usually monthly) on a company’s financial
- performance and financial position
calculates profit (net income/net loss) for month
Statement of Owner’s Equity
: explains changes in Equity for month
- shows a company’s financial position (status of assets,
- liabilities, and equity) at a point in time
Statement of Cash Flows
- : identifies cash inflows (receipts) and cash outflows
- (payments) for month
Financial Statement Analysis
- Liquidity and efficiency – ability to
- meet short-term obligations and to efficiently generate revenues
- Solvency – ability to generate future
- revenues and meet long-term obligations
- Profitability – ability to generate an
- adequate return on invested capital
- Market prospects – ability to generate
- positive market expectations
Return on Assets (ROA) also called Return on
- profitability ratio
- reflecting operating efficiency