Financial Accounting
1
IB YEAR 1 PERIOD 1
,Chapter 1
Accounting = information system that measures business activities, processes the
information into reports, and communicates the results to decision makers
- Financial accounting: focuses on providing information for external decision
makers
- Managerial accounting: focuses on providing information for internal decision
makers
Users of Accounting Information:
- Individuals
- Businesses
- Investors
- Creditors
- Taxing Authorities
Certified Public Accountants (CPAs): licensed professional accountants who serve the
general public
Certified Management Accountants (CMAs): certified professionals who specialize in
accounting and financial management knowledge; typically working for a single company
Organizations and rules that govern accounting:
- Financial Accounting Standards Board (FASB): private organization that
oversees the creation and governance of accounting standards in the U.S.
- Securities and Exchange Commission (SEC): U.S. governmental agency that
oversees the U.S. financial markets
- Generally Accepted Accounting Principles (GAAP): accounting guidelines,
currently formed by FASB; main U.S. accounting rule book
- Faithful representation: providing information that is complete, neutral,
and free from error
- Economic Entity Assumption: organization that stands apart as a separate
economic unit
- Sole Proprietorship: single owner
- Partnership: two or more owners and not organized as a corporation
- Corporation: organized under state law, separate legal entity
- Stockholders: person who owns stock in a corporation
- Limited-Liability Company (LLC): each member is only liable for his or
her own actions
- Cost Principle: acquired assets and services should be recorded at their actual
cost
- Going Concern Assumption: assumes that entity will remain in operation for the
foreseeable future
- Monetary Unit Assumption: requires items on financial statements to be
measured in terms of a monetary unit
- Internal Financial Reporting Standards: set of global accounting guidelines,
formulated by the IASB
1
, - International Accounting Standards Board (IASB): private organization that
oversees the creation and governance of IFRS
- Audit: examination of company’s financial statements and records
- Sarbanes-Oxley Act (SOX): requires management to review internal control and
take responsibility for their accuracy and completeness of their financial reports
Accounting Equation: basic tool for accounting, measuring the resources of the
business (what the business owns or has control of) and the claims to those resources
(what the business owes to creditors and to the owners); (Assets: “how the money is
spend”; Liabilities/Equity “where does the money come from”)
- Assets: economic resources that are expected to benefit the business
- Liabilities: debts that are owed to creditors
- Equity: owner’s claims to the assets
- Contributed Capital: owner’s contributions to a corporation
- Common Stock: basic ownership of a corporation
- Retained Earnings: equity earned by profitable operations that is not distributed
to stockholders
- Dividends: distribution of earnings to stockholders
- Revenues: amounts earned from delivering goods or services to customers
- Expenses: cost of selling goods or services
- Net income: revenues > expenses
- Net loss: revenues < expenses
- “On account”
- Accounts Receivable: cash receiving in the future from customers for
goods sold or services performed assets
- Accounts Payable: short-term liability
Analyzing a transaction:
1. Identify the accounts and the account type (at least two)
2. Decide if each account increases or decreases
3. Determine if the accounting equation is in balance
Financial Statements:
- Income Statement:
- Reports net income or net loss of a business for a specific period
- Revenues – Expenses = Net Income or Net Loss
- Evaluates profitability
- Statement of retained earnings:
2
1
IB YEAR 1 PERIOD 1
,Chapter 1
Accounting = information system that measures business activities, processes the
information into reports, and communicates the results to decision makers
- Financial accounting: focuses on providing information for external decision
makers
- Managerial accounting: focuses on providing information for internal decision
makers
Users of Accounting Information:
- Individuals
- Businesses
- Investors
- Creditors
- Taxing Authorities
Certified Public Accountants (CPAs): licensed professional accountants who serve the
general public
Certified Management Accountants (CMAs): certified professionals who specialize in
accounting and financial management knowledge; typically working for a single company
Organizations and rules that govern accounting:
- Financial Accounting Standards Board (FASB): private organization that
oversees the creation and governance of accounting standards in the U.S.
- Securities and Exchange Commission (SEC): U.S. governmental agency that
oversees the U.S. financial markets
- Generally Accepted Accounting Principles (GAAP): accounting guidelines,
currently formed by FASB; main U.S. accounting rule book
- Faithful representation: providing information that is complete, neutral,
and free from error
- Economic Entity Assumption: organization that stands apart as a separate
economic unit
- Sole Proprietorship: single owner
- Partnership: two or more owners and not organized as a corporation
- Corporation: organized under state law, separate legal entity
- Stockholders: person who owns stock in a corporation
- Limited-Liability Company (LLC): each member is only liable for his or
her own actions
- Cost Principle: acquired assets and services should be recorded at their actual
cost
- Going Concern Assumption: assumes that entity will remain in operation for the
foreseeable future
- Monetary Unit Assumption: requires items on financial statements to be
measured in terms of a monetary unit
- Internal Financial Reporting Standards: set of global accounting guidelines,
formulated by the IASB
1
, - International Accounting Standards Board (IASB): private organization that
oversees the creation and governance of IFRS
- Audit: examination of company’s financial statements and records
- Sarbanes-Oxley Act (SOX): requires management to review internal control and
take responsibility for their accuracy and completeness of their financial reports
Accounting Equation: basic tool for accounting, measuring the resources of the
business (what the business owns or has control of) and the claims to those resources
(what the business owes to creditors and to the owners); (Assets: “how the money is
spend”; Liabilities/Equity “where does the money come from”)
- Assets: economic resources that are expected to benefit the business
- Liabilities: debts that are owed to creditors
- Equity: owner’s claims to the assets
- Contributed Capital: owner’s contributions to a corporation
- Common Stock: basic ownership of a corporation
- Retained Earnings: equity earned by profitable operations that is not distributed
to stockholders
- Dividends: distribution of earnings to stockholders
- Revenues: amounts earned from delivering goods or services to customers
- Expenses: cost of selling goods or services
- Net income: revenues > expenses
- Net loss: revenues < expenses
- “On account”
- Accounts Receivable: cash receiving in the future from customers for
goods sold or services performed assets
- Accounts Payable: short-term liability
Analyzing a transaction:
1. Identify the accounts and the account type (at least two)
2. Decide if each account increases or decreases
3. Determine if the accounting equation is in balance
Financial Statements:
- Income Statement:
- Reports net income or net loss of a business for a specific period
- Revenues – Expenses = Net Income or Net Loss
- Evaluates profitability
- Statement of retained earnings:
2
