Chapter 1 LO 1. Explain the nature of accounting. Accounting is the process of identifying, measuring, recording, and communicating financial information. This information is used both inside and outside of the business to make better decisions. Accounting is also called the language of business. Financial accounting focuses on the needs of external decision-makers. LO 2. Identify the forms of business organizations and the types of business activities. The three forms of business organizations are the sole proprietorship (owned by one person), the partnership (jointly owned by two or more individuals), and the corporation (separate legal entity organized under the laws of a particular state). Regardless of the form of business, all businesses are involved in three activities. Financing activities include obtaining funds necessary to begin and operate a business. Investing activities involve buying the assets that enable a business to operate. Operating activities are the activities of a business that generate a profit. LO 3. Describe the relationships shown by the fundamental accounting equation. The fundamental accounting equation captures all of the economic activities recorded by an accounting system. The left side of the accounting equation shows the assets, or economic resources of a company. The right side of the accounting equation shows the claims on the company's assets (liabilities or stockholders' equity). LO 4. Prepare a classified balance sheet and understand the information it communicates. A balance sheet reports the resources (assets) owned by a company and the claims against those resources (liabilities and stockholders' equity) at a specific point in time. These elements are related by the fundamental accounting equation: In order to help users identify the fundamental economic similarities and differences between the various items on the balance sheet, assets and liabilities are classified as either current or noncurrent (long-term). Stockholders' equity is classified as either contributed capital or retained earnings. LO 5. Prepare an income statement and understand the information it communicates. The income statement reports how well a company has operated over a period of time and provides information about the future profitability and growth of a company.
The income statement includes the revenues and expenses of a company, which can be reported in either a single-step or multiple-step format. LO 6. Prepare the retained earnings statement statement and understand the information it communicates. The retained earnings statement reports how much of a company's income was retained in the business and how much was distributed to owners for a period of time. The retained earnings statement provides users with insights into a company's dividend payouts. LO 7. Understand the information communicated by the statement of cash flows. The statement of cash flows reports the sources of a company's cash inflow and the uses of a company's cash over time. The statement of cash flows can be used to assess the creditworthiness of a company. LO 8. Describe the relationships among the financial statements. There is a natural relationship among the four basic financial statements so that financial statements are prepared in a particular order. Starting with the balance sheet at the beginning of the accounting period, financial statements are generally prepared in the following order: income statement, retained earnings statement, and balance sheet at the end of the accounting period. The statement of cash flows explains the change in cash on the balance sheets at the beginning and end of the accounting period.
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