*Accounting- a systems that collects and processes (analyzes, measures, and records) financial information about an organization and

reports that information to decision makers. -Accounting system: Financial Acct Reports (periodic financial statements & related disclosures) Managerial Acct Reports- detailed plans & continuous performance reports Internal decision makers- managers External decision makers- investors, creditors, suppliers, and customers -Four Basic Financial statements: (Statement of financial position) 4. Statement of Cash Flows 1. Balance Sheet (Assets= Liabilities + Stockholders equity) (Basic accounting equation) -operation-directly relate to earning income -financing provided by owners/ investors= equity 2. Income Statement (Revenues- Expenses=Net Income) - investing- acquisition or sale of companys assets -retained earnings are reinvested in company -aka- statement of earnings, statement of operations/ income -financing- ex: payment to investors/ creditors. (except -Net income doesnt usually= net cash generated by operations suppliers) 3. Statement of Retained Earnings (Begin RE + Net Income-Dividends= End RE) - end RE is found on balance sheet under SE Relationship b/w sheets: Notes provide supplimental info abt financial conditons w/ formatting: out which the financial statements cannot be fully undstood. assets listed by liquidityease of turning into $ 3 types of notes: -liabilities- maturity (how soon to be paid off) 1. provides description on accounting rules Why is GAAP impt? 2. additional details about a line on financial statements - effects the selling price of stock 3. additional financial disclosures about items not listed. effects on the amt of bonuses received by mgmt *GAAP- are the measurement rules used to develop the -loss of competitive info to other companies information in financial statements. 3 steps of accuracy: *SEC- U.S gov. agency that determines the financial system of controls, external auditors, board of statements that public companies must provide to auditors. stockholders and the measurement rules that they must use in producing those statements. *FASB- financial accounting standards board is the private sector body given the primary respinsibulity to work out the detailed rules that become GAAP. *Audit- an examination of the financial reports to ensure that they represent what they claim and conform with GAAP Types of business entities: Price Earnings Ratio: 1. sole propietership- owned by one person income overstatement x P/E ratio= overpayment 2. partnership- owned by two or more persons known as partners - can determine the value of a company 3. corporation- Owners are shareholders/stockholders. Ownership is respresented by shares of capitol stock. -primary responsibility of the companys finicail statements lies within the companys management Objective of External Financial Reporting: *Relevant: info that can influence a decision; it is timely and have predictive value -To provide useful economic information to external users for decision making *Reliable: info is accurate, unbiased, and verifiable. Qualitative Characteristics of Financial Information: *Separate entity assumption- business transactions are accounted for separately from the - Relevant, Reliable, Comparable, and Consistent transactions of owners. Elements to Be Measured and Reported: *Unit of measure assumption- acct info should be measured in the nation monetary unit -Assets, Liabilities, SE , Revenues, Expenses, Gains, and Losses *Continuity Assumption- businesses are assumed to continue to operate into the future. Concepts for Measuring and Reporting Information: *Time period assumption- guidance on measuring revenues and expenses. - Assumptions: Separate-entity, Unit-of-measure, Continuity, Time Period *Historical cost principle- requires assets to be recorded at the historical cost-cash paid -Principles: Historical Cost, Revenue Recognition, Matching, Full Disclosure + the current $ value of all noncash considerations given on the date of the exchange -Exceptions: Cost-benefit, Materiality, Conservatism, Industry Practices *Materiality- says that small amounts that are not likely to influence a users decision can *Current Asset- will be turned into $ within one year be accounted for in the most cost- beneficial manner. *Long-term assets- ex: property, equipment, notes relievable, intangibles *conservatism- says that care should be taken not to overstate liabilities and expenses. TRANACTION-1. An exchange of assets or services for assets, services, or promises to pay b/w business / 2. A measureable internal event such as the use of assets in operations *External- exchanges of assets, goods, or services by one party to another Special examples: * Internal not direct exchanges, ex: using up paid insurance, using buildings and equipment for several years. Liabilities: ex: payable, unearned. *Account- standardized formant that originations use to accumulate the $ effect of transactions on each financial statement item. Assets: ex: receivables, prepaid expenses Principles of Transaction Analysis Assets (A) = Liabilities (L) + Stockholders Equity (SE) Duel Affect: entity both receives something and gives up something in return. 1. Every transaction affects at least two accounts; correctly identifying those accounts and the direction of the effect (whether an increase or a decrease) is critical. 2. The accounting equation must remain in balance after each transaction. ***the exchange of two promises to perform does not result in an accounting transaction Transactions that occur b/w company and external parties are recorded in general journal in chronological order ; Related accounts are updated in general ledger Current Ratios: =current assets/ Journal Entry: current liabilities -helpsT Table: if company currently has deter mine resources pay to back short term debt ; want it to be b/w1.0-2.0. Over 2 ratio is too high indicating poor use of resources. A # below 1.0 shows sufficient use of liquidity.