ExpensesOutflow (using up) of assets Generates revenue EX: wage expense, utility expense...etcExternal users of accounting informationprofit and liquidity Investors Creditors Regulators (government)Internal users of accounting informationBudget and planning Management (CEO,CFO)Financial statementsIncome statement Statement of retained earnings/Stockholders equity Balance sheet Statement of cash flowsIncome StatementSummarizes results of operations (rev&exp) over a period of time How much a company has made in total Revenue (Rev)-Expenses (Exp) = Net Income(NI)Statement of Retained EarningsNet income over the life of a company Beg. Retained Earnings (RE) + NI - Dividends (DIV) = End REStatement of Stockholders EquityMore comprehensive than RE Beg SHE + NI - DIV + Common stock (CS) issued = End balance of SHEBalance SheetShows financial position of a company at a given point of time Assets Liabilities EquityAccounting EquationAssets = Liabilities + EquityStatement of Cash FlowsShows sources of a company's cashGenerally Accepted Accounting Principles (GAAP)Set of rules and assumptions under which financial statements must be preparedGAAP set by:Securities and exchange commission (SEC) Financial accounting standards board (FASB) Public company accounting oversight board (PCAOB) International accounting standards board (IASB)/International Financial Reporting Standards (IFRS)Securities and Exchange Commission (SEC)Enforcer of standards Ultimate authorityFinancial Accounting Standards Board (FASB)Sets the accounting standards in the US Made up of those with experience in the accounting fieldPublic Company Accounting Oversight Board (PCAOB)Sets auditing standardsInternational Accounting Standards Board (IASB)Develop worldwide accounting standardsInternational Financial Reporting Standards (IFRS)Accounting standards, issued by the IASB, that have been adopted by many countries outside of the United States.Elements of annual reportManagement's discussion and analysis (what the company did well) Notes to financial statements (Explain in detail) Independent auditors report (opinion)5 Major Steps in the Accounting CycleAnalyze Record Adjust Report CloseAnalyzeTransactions from source docuentsRecordPrepare unadjusted trial balanceAdjustprepare unadjusted trial balanceReportPrepare financial statementsClosePrepare post-closing trial balanceAccounting EquationAssets = Liabilities + Stockholders' EquityExpanded Accounting EquationAssets = Liabilities + Common Stock + Revenues - Expenses - DividendsAssetAnything that will provide future economic benefitT-AccountSummarize all transactions that affect an account in one place Debits on the left Credits on the rightTrial BalanceLists all accounts and ending balance prove debits = creditsDebits and CreditsDEAD: Debits increase; Expenses, Assets, DividendsNote payableLoan from the bankAccount PayableBuying on creditCash BasisRecord revenue when cash is received Record expenses when the cash is paidAccrual BasisPreferred method Record revenue when earned, no matter when cash is received Record expenses when incurred, no matter when cash is receivedRevenue Recognition PrincipleWhen to record revenues Record revenues when the earning process is complete(delivering goods/services)Matching ConceptWhen to record expenses Match revenues earned with expenses incurred in the same accounting period when the expense helped generate revenueAdjusting EntriesAccruals DeferralsDeferralsCash first (C B/F D)Deferred RevenueUnearned revenue Adjusted when the revenue is earned Allocating previously recorded unearned revenue to earned revenueDeferred ExpensePrepaid expense Allocating previously recorded assets to expenseAccrualsCash comes after (A B/F C) Record rev/exp when earned or incurred and cash will be paid in future accounting periodAccrued Assetcreates a receivable Recording revenue that has been earned but not recorded or receivedAccrued Liabilitycreates a payable Recording operating expenses that has been earned but not yet paid or recordedClosing entries, permanentBalance sheet accounts Not closedClosing entries, temporaryRevenue, Expenses, Dividends Closed at the end of each periodWhy are temporary accounts closed at the end of the accounting period?To transfer all net income and dividends to retained earningsClassified Balance SheetBreaks basic accounting equation categories (assets, liabilities, Stockholders equity) into sub groupsClassified Balance Sheet AssetsCurrent assets Long-term assetsCurrent assetsExected to be used up within one year Listed in order of liquidityCurrent assets in order of liquidity1. Cash 2. Short term investments 3. Accounts receivable 4. Inventory 5. Supplies 6. Prepaid expensesLong Term AssetsExpected usefulness to exceed one year EX: PP&E, Investments, Intangible assetsProperty, Plant, and EquipmentA type of long term asset used in a companies operations for more than one year EX: Building, land , equipmentInvestmentHeld for more than one year intended for future use or saleintangable assetsAsset with no physical substance EX: copyright, patents, trademarkClassified Balance Sheet Liabilitiescurrent liabilities long-term liabilitiesCurrent LiabilitiesDebts/ obligations expected to be paid within one year EX: A/P, accrued wages (wages payable), Current portion of long term debtLong term LiabilitiesDebts/ obligations that come due more than one year from balance sheet date EX: Bond payableStockholders' EquityResidential ownership in assets of a business after all liabilities have been satisfiedAnalyzing liquidity using a classified balance sheetWorking capital Current ratioWorking Capitalcurrent assets - current liabilities (CA-CL)Current Ratiocurrent assets / current liabilities (CA/CL) Higher ratio = more liquid the company