Lecture 1 - Introduction to Financial Accouting, Summaries of Financial Accounting

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Financial Accounting: Session 1 Chapter 1 Introduction to Financial Accounting

Learning Objectives

1. Explain why accounting is critical to business.
2. Explain and Apply underlying accounting concepts, assumptions and principles.
3. Apply the accounting equation to business organizations. 4. Construct financial statements and analyze the relationships among them. 5. Evaluate business decisions ethically.

Explain why accounting is critical to

business

Accounting is an information system

that:

• Measures business activities
• Processes data into financial

statements and reports

• Communicates results to decision

makers

Exhibit 1-1 | The Flow of Accounting

Information

Two Types of Accounting

Financial Accounting

• For decision makers outside the entity - Investors - Creditors - Government agencies - The public Managerial Accounting
• For managers inside the entity
• Budgets
• Forecasts
• Projections

Exhibit 1-2 | The Various Forms of

Business Organization

Organizing a Business

Partnership

• Two or more parties as co-owners
• Income and losses “flow through” to partners
• Many are small or medium-sized companies
• General partnerships have mutual agency

and unlimited liability

• In limited-liability partnerships, only liable

up to the investment put in

Organizing a Business Limited-Liability Company

• Business (not owners) is liable for

debts

• May have one owner or many, called

members

• Members have limited liability
• Income “flows through” to members

Organizing a Business Corporation

• Double taxation
  • Corporation pays income tax
  • Shareholders taxed on dividends
• Stockholders elect board of directors, which
  • Sets policy
  • Appoints officers

Learning Objective Two

Explain and apply underlying

accounting concepts,

assumptions, and principles.

Exhibit 1-3 | Conceptual Foundation of Accounting

Assumptions and Principles Entity Assumption

• An organization stands apart from other organizations and individuals as a separate economic unit Continuity (Going-Concern) Assumption
• Entity will continue to operate for the foreseeable future Historical Cost Principle
• Assets should be recorded at their actual cost on the date of purchase Stable-Monetary-Unit Assumption
• Assume the dollar’s purchasing power is stable over time

The Accounting Equation

Assets = Liabilities + Equity

Exhibit 1-4 | The Accounting Equation