Accounting 1
Chapter 1 Financial statements and business decisions
Creditors lend money to a company for a specific length of time. They hope to gain by charging
interest on the money they lend. Some borrowers n not repay their debts. When a company
borrows additional money or pays back money to its lenders and receives additional funds or
pays dividends to owners, these are called financing activities. If the company buys or sells items
such as plant and equipment used in producing, these are called investing activities.
To understand a company’s financial statements, you must understand its operating activities. A
company purchases equipment from other companies, called suppliers. Other company’s can buy
their products again, who are called customers.
Accounting is a system that collects and process (analyzes, measures and records) financial
information about an organization and reports that information to decision makers. Managers
(called internal decision makers) and parties outside the firm (called external decision makers)
use the reports produced by the accounting system. There are 2 parts in the Accounting system:
1. Financial accounting reports:
Periodic financial statements and related disclosures (toelichtingen) with the four basic
financial statements and related disclosures that are the output of this system: creditors
(lenders), investors (owners), suppliers and customers.
2. Managerial accounting reports:
Detailed plans and continuous performance reports by managers
,The four basic financial statements:
1. Balance sheet: reports the amount of assets, liabilities and stockholders’ equity of an
accounting entity in a point of time;
2. Income statement: reports the revenues less the expenses of the accounting period;
3. Statement of retained earnings: reports the way that net income (eigen vermogen) and
distribution of dividends affected the financial position of the company during the
accounting period;
4. Statement of cash flows: reports inflows and outflows of cash during the accounting
period in the categories of operating, investing and financing.
They summarize the financial activities of the business. Companies make quarterly reports and
annual reports.
The balance sheet
Report the financial position (amount of assets, liabilities, and stockholders’ equity) of an
accounting entity* at a particular point in time. Also called Statement of Financial Position.
*Accounting entity: the organization for which financial data are to be collected.
Structure
1. Name of entity
2. Title of the statement
3. Specific date of the statement
4. Unit of measure
, The basic accounting equation (also called balance sheet equation):
Assets = Liabilities + Stockholders’ equity
Elements:
1. Assets: economic resources owned by the company (cash, accounts receivable,
inventories, plant and equipment and land). Every asset on the balance sheet is initially
measured at the total cost incurred to acquire it;
2. Liabilities: company’s debts or obligations (accounts payable and notes payable);
3. Stockholders’ equity: indicates the amount of financing provided by owners of the
business and earnings. The investment of cash and other assets in the business by the
owners is called contributed capital. The amount of earnings (profits) reinvested in the
business (and thus not distributed to stockholders in the form of dividends) is called
retained earnings (reserves).
Chapter 1 Financial statements and business decisions
Creditors lend money to a company for a specific length of time. They hope to gain by charging
interest on the money they lend. Some borrowers n not repay their debts. When a company
borrows additional money or pays back money to its lenders and receives additional funds or
pays dividends to owners, these are called financing activities. If the company buys or sells items
such as plant and equipment used in producing, these are called investing activities.
To understand a company’s financial statements, you must understand its operating activities. A
company purchases equipment from other companies, called suppliers. Other company’s can buy
their products again, who are called customers.
Accounting is a system that collects and process (analyzes, measures and records) financial
information about an organization and reports that information to decision makers. Managers
(called internal decision makers) and parties outside the firm (called external decision makers)
use the reports produced by the accounting system. There are 2 parts in the Accounting system:
1. Financial accounting reports:
Periodic financial statements and related disclosures (toelichtingen) with the four basic
financial statements and related disclosures that are the output of this system: creditors
(lenders), investors (owners), suppliers and customers.
2. Managerial accounting reports:
Detailed plans and continuous performance reports by managers
,The four basic financial statements:
1. Balance sheet: reports the amount of assets, liabilities and stockholders’ equity of an
accounting entity in a point of time;
2. Income statement: reports the revenues less the expenses of the accounting period;
3. Statement of retained earnings: reports the way that net income (eigen vermogen) and
distribution of dividends affected the financial position of the company during the
accounting period;
4. Statement of cash flows: reports inflows and outflows of cash during the accounting
period in the categories of operating, investing and financing.
They summarize the financial activities of the business. Companies make quarterly reports and
annual reports.
The balance sheet
Report the financial position (amount of assets, liabilities, and stockholders’ equity) of an
accounting entity* at a particular point in time. Also called Statement of Financial Position.
*Accounting entity: the organization for which financial data are to be collected.
Structure
1. Name of entity
2. Title of the statement
3. Specific date of the statement
4. Unit of measure
, The basic accounting equation (also called balance sheet equation):
Assets = Liabilities + Stockholders’ equity
Elements:
1. Assets: economic resources owned by the company (cash, accounts receivable,
inventories, plant and equipment and land). Every asset on the balance sheet is initially
measured at the total cost incurred to acquire it;
2. Liabilities: company’s debts or obligations (accounts payable and notes payable);
3. Stockholders’ equity: indicates the amount of financing provided by owners of the
business and earnings. The investment of cash and other assets in the business by the
owners is called contributed capital. The amount of earnings (profits) reinvested in the
business (and thus not distributed to stockholders in the form of dividends) is called
retained earnings (reserves).
