The Financial Accounting and Its Environment

Financial accounting provides information to decision makers who are external to the business.Examples include present and future shareholders, present and future creditors, and government regulators.Managerial accounting provides information to decision makers who are internal to the business.This information is not published to people outside of the business
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The Financial Accounting and Its EnvironmentFinancial Accountingand Its Environment Chapter1Major Types of Accounting• Financialaccountingprovides informationtodecisionmakerswhoare externaltothebusiness. – Examplesincludepresentandfuture shareholders,presentandfuturecreditors,and governmentregulators.Major Types of Accounting• Managerialaccountingprovides informationtodecisionmakerswhoare internaltothebusiness. – Thisinformationisnotpublishedtopeople outsideofthebusiness.Major Types of Accounting• Taxaccountinginvolvestaxcompliance andtaxplanning. – Taxcomplianceinvolvesthecalculationof thecompanystaxliabilityafterthe transactionsforayearhavebeencompleted.Major Types of Accounting• Taxaccountinginvolvestaxcompliance andtaxplanning. – Taxplanninginvolvestheconsiderationofa transactionbeforeithastakenplaceinorder todeterminetaxconsequences.Major Types of Accounting• AccountingInformationSystems – Theprocessesandproceduresrequiredto generateaccountinginformation.Major Types of Accounting• NonbusinessOrganizationAccounting – Dealswiththeaccountingneedsof organizationswhichdonotattempttoearna profit,suchashospitals,colleges,and churches.Overview of FinancialAccounting Past Financial Transactions and Accounting Other Economic Process Events Financial Decision Statements MakersThe Financial AccountingProcess• Categorizepasttransactionsandevents.• Measureattributesofthosetransactions andevents.• Recordandsummarizethemeasurements. The Financial AccountingProcess• Theinitialvaluationofatransactionis generallynotchangedinthefuture. – Thisoriginalmeasurementiscalledthe historicalcost.Primary FinancialStatements• Theendresultoftheaccountingprocessis thepreparationofthefollowing: – Balancesheet – Incomestatement – StatementofcashflowsThe Balance Sheet• Thebalancesheetshowsafirmsassets, liabilities,andownersequityatonepoint intime.The Balance Sheet• Assetsarevaluableresourcesthatafirm owns.• Liabilitiesareobligationstoconvey somethingofvalueinthefuture.The Balance Sheet• Ownersequityisaresidualamount, calculatedbysubtractingliabilitiesfrom assets. – Ifassetsare$300andliabilitiesare$50,then ownersequitymustequal$250.The Balance Sheet Assets Liabilities and Owners’ Equity Cash 5,000 Liabilities Accounts receivable 7,000 Accounts payable 8,000 Inventory 10,000 Notes payable 2,000 Equipment 7,000 Total liabilities 10,000 Owners’ equity 19,000 Total assets 29,000 Total liabilities and owners’ equity 29,000The Income Statement• Theincomestatementsummarizesafirms revenuesandexpensesforaperiodof time.The Income Statement• Revenuesareinflowsofassetsfrom providinggoodsandservicesto customers.• Expensesarethecostsincurredto generaterevenues.The Income Statement• Ifrevenuesexceedexpenses,thenthe resultisnetincome.• Ifexpensesexceedrevenues,thenthe resultisanetloss. – Ifexpensesare$500andrevenuesare$400, thenthereisanetlossof$100.The Income Statement Revenues Sales 63,000 Expenses Cost of goods sold 35,000 General and administrative 20,000 Tax 3,000 Total expenses 58,000 Net income 5,000The Statement of CashFlows• Thestatementofcashflowssummarizesa firmsinflowsandoutflowsofcashovera periodoftime.