Financial Accounting: Chapter Notes

Topics: Generally Accepted Accounting Principles, Balance sheet, Liability Pages: 25 (4725 words) Published: March 28, 2014
Lesson 1:  The Accounting Process
(Textbook Libby et al. Chapters 1 and 2).
When you have successfully completed this lesson, you will be able to... Define accounting and explain its purpose
Define business and identify the different types of businesses Explain the accounting equation: Assets = Liabilities + Owner's Equity Visualize the start of a business, create accounting transactions for it, and prepare simple financial statements  Reading Assignment

Please read chapters 1 and 2 of your textbook.
Recommended Problem Assignment
Chapter 1. Please complete MC questions plus Exercises 1-1, 1-3, 1-7, 1-8, 1-9 and 1-11 Chapter 2. Please complete MC questions plus Exercises 2-5, 2-7, 2-9, 2-12 and 2-13 Answers to these assignments are available in the folder “Answers to Assigned Multiple Choice and Exercises.” Outline of Readings:   Chapter 1

Reviews the information conveyed in Financial Statements and how accounting is used for decision making.   Balance Sheet (Statement of Financial Position)
Income Statement (Statement of Income, Statement of Earnings, Statement of Operations) Statement of Retained Earnings (or the more comprehensive Statement of Stockholder’s Equity) Statement of Cash Flows

Discusses financial analysis. Financial analysis is a way to use financial information to answer questions about the financial strength and well being of a company.   Also reviews cash flow analysis as a useful tool for evaluating financial growth and success. DISCUSSION

We first discuss the nature of business and how businesses operate. What Is Business?
A business is a financial entity formed to produce and distribute products or services to customers. What factors combine to make a successful business?  For a small business, an entrepreneur brings together capital (money invested in the business),

resources (raw materials or expertise), and
labor (skilled people who convert resources into usable products or services) In order to sell products or services to consumers,  businesses are formed to produce goods and services.  Businesses combine resources, labor, and capital to create these products and services.  Owners and managers direct the business and make the operating decisions to help make the company successful.  Accounting is essential to businesses because it provides the owners and managers with feedback on how well the business is operating.  The accounting process gathers financial information and communicates it to users so that these users (owners, creditors) can make decisions about how to proceed with business operations.  Accounting, therefore, is a decision-making tool. The Basic Structure of Accounting

All businesses and individuals need and use accounting to keep track of financial transactions.  A transaction is at the heart of the accounting process.  Whenever a financial exchange occurs between people or businesses, the accounting process measures and records that economic event as a transaction.  Examples:  When someone is paid to provide a service (such as mowing a lawn), an accounting transaction has occurred.  The exchange is between the service provider (mower) and the service requester (lawn owner).  If the provider (one person) is mowing another person's lawn, then a transaction is recorded between the two individuals.  If, however, the mowing is provided by a lawn care service to a nursing home, then the transaction is between two businesses.  Any two parties can create a transaction with each other. The textbook begins the story of accounting by identifying the users of accounting information.  The act of incorporating a transaction into the company’s financial accounting system creates a permanent record of the transaction.  We use the accounting information contained in the accounting records both to evaluate current activities and to make future decisions.  When the managers of a business provide an external report of the transactions conducted by the...
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