Financial Accounting: Statements and Vocabulary for Decision

School: McMaster University - Course: COMMERCE 1AA3 - Subject: Accounting

1AA3: Financial Accounting Chapter 1:Financial Statements Vocabulary oIncome statement (Statement of Net Earnings) oStatement of Retained Earnings (sometimes included in a statement of Owner's equity) oBalance Sheet oCash Flow Statement oStatement of other Comprehensive Income Financial Statements oReports that companies use to convey the financial results of their business activities to various user groups, which can include managers, investors, creditors, and regulatory agencies. In turn, these parties use the reported information to make a variety of decisions, such as whether to invest in or loan money to the company Using Accounting Information oNet earnings Sales or revenue over expenses Objective 1: Explain Why Accounting is the Language of Business oAccounting is an information system that measures and records business activities, processes data into reports, and reports results to decision makers. Who Uses Accounting Information oManagers Accounting information helps managers make business decisions such as whether they should expand their business into new markets or develop a new product oInvestors and Creditors Provide money to finance a businesses activities Investors Exchange their money in return for a share in the company Use accounting info to predict how much income they can make on their investment Creditors Lend money to businesses Use accounting info to understand how a company is going to pay them back oGovernments and Regulatory Bodies Use accounting info to determine how much money is owed in taxes, as well as to regulate companies oIndividuals

Use accounting info in everyday life such as predicting monthly income to pay rent, cover expenses, and save money oNot for Profit Organizations Base financial decisions off of accounting information The Two Kinds of Accounting oFinancial Accounting provides information for managers inside the business and for decision makers outside the organization, such as investors, creditors, government agencies, and the public. This information must be relevant for the needs of decision makers and must provide a faithful representation of the entity's economic activities. oManagement Accounting generates inside information for the managers of the organization. Examples of management accounting information include budgets, forecasts, and projections that are used to make strategic business decisions. Organizing a Business oProprietorship an unincorporated business with a single owner, called the proprietor tend to be small businesses, such as the vendors that set up stalls at farmers' markets, or individual professional organizations, such as physicians, lawyers, and accountants. From a legal perspective, the business is the proprietor, and the proprietor is personally liable for all business debts. But for accounting, a proprietorship is an entity separate from its proprietor. oPartnerships an unincorporated business with two or more parties as co-owners, and each owner is a partner. Individuals, corporations, partnerships, or other types of entities can be partners. Most partnerships are small or medium-sized, but some are very large, with several hundred partners. Accounting treats the partnership as a separate organization, distinct from the personal affairs of each partner. Normally, each partner is personally liable for all the partnership's debts. For this reason, partnerships can be quite risky oCorporations an incorporated business owned by its shareholders, who own shares representing partial ownership of the corporation One of the major advantages of a corporation is the ability to raise large sums of capital by issuing shares to the public. Corporations are formed under law

unlike proprietorships and partnerships, a corporation is distinct from its owners. The corporation is like an artificial person and possesses many of the rights that a person has. Objective 2: Describe the Purpose and Explain the Elements of Each Financial Statement oIncome Statement How much income did the company earn during the year? Measures Operating Performance Calculation Total Income (revenue + gains) - Total Expenses (Expenses +losses) = Net Income (or Net Loss) Income Includes revenue and gains accumulated by a company Revenue oamounts earned by a company in the course of its ordinary, day-to-day business activities. oAlso known as sales, fees, interest, dividends, royalties, and rent Gains orepresent other items that result in anincreasein economic benefits to a company and may, but usually do not, occur in the course of the company's ordinary business activities.