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Skyline College

Chapter

1

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The Need for Financial Information

In running a business, you need answers to questions.

$ How much cash does the business have?

$ How much money do customers owe?

$ What is the cost of the merchandise sold?

$ What is the change in sales volume?

$ How much money is owed suppliers?$ What is the profit or loss?

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Accounting Defined

Objective 1

to owners, managers, and other interested parties.

Accounting is the process by which financial information about a business is

recordedclassifiedsummarizedinterpretedcommunicated

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Financial statements are periodic reports of a firm’s financial position or operating results. Included are:

Income StatementBalance SheetStatement of Owner’s EquityStatement of Cash Flows

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Accounting Clerk

Many jobs are available in the accounting profession. Some examples are:

Bookkeeper

Accountant

Accounting Careers

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Accounting ClerkAccounting Clerk

Usually requires one to two accounting courses

Generally requires little or no experience

Requires computer skills: Computerized accounting Word Excel

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Bookkeeper

Usually requires one to two years of accounting education

Generally requires experience as an accounting clerk

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Accountant

Usually requires a bachelor’s degree

Most entry-level positions do not require experience.

Accountants work in one of these areas: Public accounting Managerial accounting Governmental accounting

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Public Accounting

•Auditing

•Tax accounting

•Management advisory services

A certified public accountant, or CPA, is an independent accountant who provides accounting services to the public for a fee. They provide services such as:

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Managerial Accounting

accounting work carried on by an accountant employed by a single business in industry. They involve working on:

•Establish accounting policies

•Manage the accounting system

•Prepare and interpret financial statements

•Prepare tax forms and do tax planning

•Prepare internal reports for management

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Governmental Accounting

• Securities and Exchange Commission (SEC)

• Internal Revenue Service (IRS)

• Federal Bureau of Investigation (FBI)

• Homeland Security

involves keeping financial records and preparing financial reports as part of the staff of federal, state, or local governmental units, such as:

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Inside The Business Outside The Business

EmployeeEmployeess

Financial

Reports

Users of Financial Information

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CustomersCustomers

Use financial information to:

• Determine the economic health of the business

• Determine the likelihood that the firm will remain in business to provide parts, service, and support

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Negotiate wages and benefits

Monitor profit-sharing plans

Employees and UnionsEmployees and Unions

Use financial information to:

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Sarbanes-Oxley ActSarbanes-Oxley Act

Major change in the regulatory environment.

•Is designed to crackdown on corporate fraud and corruption.

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Three major legal forms of business entity:Three major legal forms of business entity:

Sole Proprietorship

Partnership

Corporation

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a business entity owned by one person who is legally responsible for the debts and taxes of the business.

Sole Proprietorship

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a business entity owned by two or more people who are legally responsible for the debts and taxes of the business.

Partnership

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Typical partnershipsTypical partnerships

Professional services such as:

Accounting Firms

Architectural Firms

Dental Practices

Medical Practices

Law Firms

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Partners must agree upon:Partners must agree upon:

• Amount each partner will contribute

• Percentage of ownership of each partner

• Share of profits of each partner

• Duties each partner will perform

• Debts - the responsibility each partner has for the partnership’s debts

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a publicly or privately owned business entity that is separate from its owners and has a legal right to own property and do business in its own name; stockholders are not responsible for the debts or taxes of the business.

Corporation

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PartnershipSole

Proprietorship

Ownership 1 owner

Ends when owner:• is unable to carry on,• dies, or• closes the firm

Life

Responsibility for business debts if firm is unable to pay

Owner

2 or more

Ends when partner(s): • dies,• close the firm• withdraws

Partners individually and jointly

Can be thousands

Continues indefinitely

Stockholders can lose only the amount invested

Corporation

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Corporate ownership is determined by the number of shares held compared to the number of shares

issued by the corporation.

Corporations can have new owners daily if their shares are actively traded on stock exchanges.

Corporate Ownership

Stock is issued in the form of stock certificates and represents ownership of the corporation.

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Stockholders (owners of a corporation) have voting rights for certain corporate decisions, one per share.

Stockholders can lose only up to the amount of their investment (cost of stock) if the business is unable to pay its debts.

Stockholders

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All three forms of business operate under the. . .

Separate Entity Assumption.

The separate entity assumption is the concept of keeping a firm’s financial records separate from the owner’s personal financial records.

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Generally Accepted Accounting Principles

(GAAP) are accounting standards developed and applied by professional accountants.

Publicly owned companies must follow GAAP.

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Development of GAAP

SEC

FASB

GovernmentalAgency

AccountingProfession

Delegates to…

Has final say

Develops GAAP

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Audit Report

An auditor’s report is an independent accountant’s review of a firm’s financial statements and certifies that the firm has used GAAP.