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Financial accounting the impact on decision makers 9e chapter 1

Chapter 1
Accounting as a Form of

What is Business?
 Consists

of activities necessary to provide
members of society with goods and services

LO 1

Exhibit 1.1—Types of Businesses

Exhibit 1.2—Forms of Organization

LO 2

Business Entities
 An

organization operated to earn a profit
 Sole Proprietorships: organization with a single
 Partnerships: business owned by two or more
 Often used

by accounting firms and law firms

 Corporations: entity organized under

a particular state
 Ownership

evidenced by shares of stock

the laws of

Nonbusiness Entities
 Organization

operated for some purpose other
than to earn a profit
 Do not have an identifiable owner

Organizations and Social Responsibility
 U.S.

business entities recognize the societal
aspects of their overall mission and have
established programs to meet these

Nature of Business Activity
 Businesses

engage in three types of activities:







• Borrowing
• Sale of stock

• Purchase and
sale of assets

• Sale of
• Costs incurred
to operate
LO 3

Exhibit 1.3—A Model of Business

What is Accounting?


Various Users
Financial analysts

LO 4

Users of Accounting Information
and Their Needs
 Internal Users:
 Primarily

the managers of a company
 Involved in the daily affairs of the business
 External Users:
 Not

directly involved in the operations of a business
 Need information that differs from that needed by
internal users
 Outsiders must rely on the information presented by
the company’s management

Management Accounting and
Financial Accounting
 Management accounting
 Branch of

accounting concerned with providing
management with information to facilitate planning
and control

 Financial accounting
 Branch of

accounting concerned with the
preparation of financial statements for outsider use

Exhibit 1.4—Users of Accounting

Financial Decision Framework

Formulate the question
Gather information from the financial
statements and other sources
Analyze the information gathered
Make the decision
Monitor your decision

The Accounting Equation
 Assets

= Liabilities + Owners’ Equity
 Left side: valuable economic resources and that
will provide future benefit to the company
 Right side: indicates who provided, or has a
claim to, the assets
 Stockholders’ equity or shareholders’ equity:
used to refer to the owners’ equity of a
LO 5

Source of Stockholders’ Equity
 Created

when a company issues stock to an

 Retained earnings

 Earnings accumulated or

retained by the company
 Part of owners’ equity that represents the income
earned less dividends paid over the life of an entity

The Balance Sheet
 Financial

statement that summarizes the assets,
liabilities, and owners’ equity at a specific point
in time
 At any point in time, assets must equal liabilities
and owners’ equity

Example 1.4—Preparing a Balance

The Income Statement
 Summarizes

the revenues and expenses of a
company for a period of time

EXHIBIT 1.5—The Relationship Between the
Accounting Equation and the Balance Sheet

Example 1.5—Preparing an Income

The Statement of Retained Earnings
 Summarizes

the income earned and dividends
paid over the life of a business
 Dividends: Distribution of the net income of a
business to its owners

Example 1.6—Preparing a Statement of
Retained Earnings

The Statement of Cash Flows
 Summarizes

a company’s cash receipts and cash
payments during the period from operating,
investing, and financing activities

Example 1.7—Preparing a Statement of
Cash Flows

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