Financial management.
Chapter 1
- Accounting: is an information system that measures, processes, and
communicates financial information about businesses.
- Economic entity: is a unit that exists independently, such as a business, hospital
or a governmental body.
- 1: Accounting measures business activities by recording data
- 2: Data are stored until needed and processed to become useful
information.
- 3: Information communicated through reports to decision makers.
- 4: Based on this information decision maker take actions.
- Financial accounting: how well the business has achieved its goals.
- Financial statements: reports of achieved goals
- Bookkeeping: is the process of recording financial transactions and keeping
financial records.
- Management information system: Provide the information needed to run a
business.
- Managerial accounting: is about operating, investing, and financial activities.
Managers and employees need information about how they have done it in the
past and what they can expect in the future.
- How to make an accounting measurement: You have to answer 4 questions
- 1: What is measured?
- 2: When should the measurement be made?
- 3: What value should be placed on what is measured?
- 4: How should what is measured be classified?
- What is measured?
- Business transactions: are economic events that affect a business financial
position
- Money measure: All businesses transactions are recorded in terms of money.
- Separate entity: A business should have its own set of financial records, and its
records and reports should refer only to its own affairs.
- Three forms of business organization:
- 1: Sole proprietorship: a business owned by one person.
- 2: Partnership : It has two or more owners
- 3: Corporation: is a business unit chartered by the state and legally separate
from its own owners.
- Stockholder: whose ownership is represented by shares of stock do not directly
control the corporation’s operations.
- Limited liability: their risk of loss is limited to the amount they paid for their
shares.
- Financial position: refers to a company’s economic resources, such as cash,
inventory, and buildings, and the claims against those resources at a particular
time.
- Equities: Are claims
- Economic resources = Creditors equities + owner’s equity = the same as:
- Assets = Liabilities + owner’s equity.
, - Assets: are the economic resources that are expected to benefit the company’s
future operations.
- Liabilities: Are a business’s present obligations to pay cash, transfer assets, or
provide services to other entities in the future.
- Owner’s equity= Assets – Liabilities
- Owner’s investments: are assets that the owner puts into the business.
- Withdrawals: are assets that the owner takes out of the business.
- Revenues: are the increases of the owner’s equity
- Expenses: are the decreases of the owner’s equity
- Financial statements: are the primary means of communicating accounting
information about a business to those who have an interest in the business.
- Income statement: summarizes the revenues earned and expenses incurred by
a business over an accounting period.
- Statement of owner’s equity: shows the changes in owner’s equity over an
accounting period.
- Balance sheet: show the financial position of a business on a certain date,
usually at the end of the month or year.
- Statement of cash flows: focuses on liquidity, that is, balancing the inflows and
outflows of cash to enable it to operate and pay its bills when they are due.
- Cash flows: are the inflows and outflows of cash into and out of a business.
- Cash flows organized according to three major business activities.
- Cash flows from operating activities.
- Cash flows from investing activities.
- Cash flows from financing activities.
- General accepted accounting principles: conventions, rules and procedures
necessary to define accepted accounting practice at a particular time.
Many companies have their financial statements audited by an independent certified
public accountant. Independent means that the CPA is not an employee of the company.
- Audit: is an examination of a company’s financial statements and the accounting
systems, controls, and records that produced them.
- Purpose of the audit: ascertain that the financial statement have been prepared
in accordance with generally accepted accounting principles.
- CPA requires:
- Integrity : be honest and candid.
- Objectivity: be impartial and intellectually honest
- Independence: Avoid all relationships that impair or appear to impair objectivity.
- People who use the accounting information to make decisions fall into
three categories:
- Managers: responsible for ensuring that a company meets its goals of profitability
and liquidity. Making decisions of operating, investing and financial activities are
the basic functions of a manager.
- Users with a direct financial interest: Investors and creditors ( those who lend
money or products) study the financial statements carefully.
- Users with an indirect financial interest: Government (taxes) and public
groups
- Business: an economic unit that aims to sell goods and services at prices that
will provide an adequate return to its owners.
, - Profitability: the ability to earn enough income to attract and hold investment
capital.
- Liquidity: is ability to have enough cash to pay debts when they are due.
- Operating activities: include buying, producing and selling goods and services.
- Investing activities: involve spending a company’s capital in ways that will help
it achieve its goals
- Financing activities: involve obtaining adequate funds to begin operating the
business and to continue operating it.
- Financial analysis: the use of financial statements to determine that a business
is well managed and is achieving its goals.
- Profitability is measured in net income
- Liquidity is measured in cash flows
- Ethics: a code of conduct that applies to everyday life.
- Fraudulent financial reporting: international preparation of misleading financial
statements.
Chapter 2
- Business transactions: economic events that should be recorded in the
accounting records.
- Recognition: refers to the decision as to when to record a transaction
- Valuation: what value to place on the transaction
- Cost principle: recording transactions at the exchange price at the point of
recognition.
- Classification: the process of assigning all the transactions in which a business
engages to appropriate categories, or accounts. Categorize all transactions
- Accounts: basic storage units for accounting data and are used to accumulate
amounts from similar transactions.
- General ledger: each account is kept on a separate page or called, placed
together in a book or file.
- Chart of amounts: Is to help identify accounts in the ledger and make them easy
to find.
- T account: has a title, identifies the asset, liability or owner’s equity. Has a left
side called debit, and a right side called credit.
- T account illustrated: Transactions can be summarized by recording receipts on
the left (debit) side, and payments on the right (credit) side.
- Footings: which are calculated at the end of the month, are an easy way to
determine cash on hand.
- Account balance: difference between total debit and total credit
- Rules of double-entry account: Every transaction affects at least two accounts,
and total debits must equal total credits.
- Assets = liabilities + owner’s equity.
- Debit assets increase credit owner’s equity/ liabilities increase
- Credit assets decrease debit owner’s equity / liabilities decrease
- Owner’s equity = Owner’s capital – withdrawals + revenues – expenses
- Withdrawals/ expenses increase owner’s equity decrease
- Normal balance: is its usual balance and is the side that increases the account.
Chapter 1
- Accounting: is an information system that measures, processes, and
communicates financial information about businesses.
- Economic entity: is a unit that exists independently, such as a business, hospital
or a governmental body.
- 1: Accounting measures business activities by recording data
- 2: Data are stored until needed and processed to become useful
information.
- 3: Information communicated through reports to decision makers.
- 4: Based on this information decision maker take actions.
- Financial accounting: how well the business has achieved its goals.
- Financial statements: reports of achieved goals
- Bookkeeping: is the process of recording financial transactions and keeping
financial records.
- Management information system: Provide the information needed to run a
business.
- Managerial accounting: is about operating, investing, and financial activities.
Managers and employees need information about how they have done it in the
past and what they can expect in the future.
- How to make an accounting measurement: You have to answer 4 questions
- 1: What is measured?
- 2: When should the measurement be made?
- 3: What value should be placed on what is measured?
- 4: How should what is measured be classified?
- What is measured?
- Business transactions: are economic events that affect a business financial
position
- Money measure: All businesses transactions are recorded in terms of money.
- Separate entity: A business should have its own set of financial records, and its
records and reports should refer only to its own affairs.
- Three forms of business organization:
- 1: Sole proprietorship: a business owned by one person.
- 2: Partnership : It has two or more owners
- 3: Corporation: is a business unit chartered by the state and legally separate
from its own owners.
- Stockholder: whose ownership is represented by shares of stock do not directly
control the corporation’s operations.
- Limited liability: their risk of loss is limited to the amount they paid for their
shares.
- Financial position: refers to a company’s economic resources, such as cash,
inventory, and buildings, and the claims against those resources at a particular
time.
- Equities: Are claims
- Economic resources = Creditors equities + owner’s equity = the same as:
- Assets = Liabilities + owner’s equity.
, - Assets: are the economic resources that are expected to benefit the company’s
future operations.
- Liabilities: Are a business’s present obligations to pay cash, transfer assets, or
provide services to other entities in the future.
- Owner’s equity= Assets – Liabilities
- Owner’s investments: are assets that the owner puts into the business.
- Withdrawals: are assets that the owner takes out of the business.
- Revenues: are the increases of the owner’s equity
- Expenses: are the decreases of the owner’s equity
- Financial statements: are the primary means of communicating accounting
information about a business to those who have an interest in the business.
- Income statement: summarizes the revenues earned and expenses incurred by
a business over an accounting period.
- Statement of owner’s equity: shows the changes in owner’s equity over an
accounting period.
- Balance sheet: show the financial position of a business on a certain date,
usually at the end of the month or year.
- Statement of cash flows: focuses on liquidity, that is, balancing the inflows and
outflows of cash to enable it to operate and pay its bills when they are due.
- Cash flows: are the inflows and outflows of cash into and out of a business.
- Cash flows organized according to three major business activities.
- Cash flows from operating activities.
- Cash flows from investing activities.
- Cash flows from financing activities.
- General accepted accounting principles: conventions, rules and procedures
necessary to define accepted accounting practice at a particular time.
Many companies have their financial statements audited by an independent certified
public accountant. Independent means that the CPA is not an employee of the company.
- Audit: is an examination of a company’s financial statements and the accounting
systems, controls, and records that produced them.
- Purpose of the audit: ascertain that the financial statement have been prepared
in accordance with generally accepted accounting principles.
- CPA requires:
- Integrity : be honest and candid.
- Objectivity: be impartial and intellectually honest
- Independence: Avoid all relationships that impair or appear to impair objectivity.
- People who use the accounting information to make decisions fall into
three categories:
- Managers: responsible for ensuring that a company meets its goals of profitability
and liquidity. Making decisions of operating, investing and financial activities are
the basic functions of a manager.
- Users with a direct financial interest: Investors and creditors ( those who lend
money or products) study the financial statements carefully.
- Users with an indirect financial interest: Government (taxes) and public
groups
- Business: an economic unit that aims to sell goods and services at prices that
will provide an adequate return to its owners.
, - Profitability: the ability to earn enough income to attract and hold investment
capital.
- Liquidity: is ability to have enough cash to pay debts when they are due.
- Operating activities: include buying, producing and selling goods and services.
- Investing activities: involve spending a company’s capital in ways that will help
it achieve its goals
- Financing activities: involve obtaining adequate funds to begin operating the
business and to continue operating it.
- Financial analysis: the use of financial statements to determine that a business
is well managed and is achieving its goals.
- Profitability is measured in net income
- Liquidity is measured in cash flows
- Ethics: a code of conduct that applies to everyday life.
- Fraudulent financial reporting: international preparation of misleading financial
statements.
Chapter 2
- Business transactions: economic events that should be recorded in the
accounting records.
- Recognition: refers to the decision as to when to record a transaction
- Valuation: what value to place on the transaction
- Cost principle: recording transactions at the exchange price at the point of
recognition.
- Classification: the process of assigning all the transactions in which a business
engages to appropriate categories, or accounts. Categorize all transactions
- Accounts: basic storage units for accounting data and are used to accumulate
amounts from similar transactions.
- General ledger: each account is kept on a separate page or called, placed
together in a book or file.
- Chart of amounts: Is to help identify accounts in the ledger and make them easy
to find.
- T account: has a title, identifies the asset, liability or owner’s equity. Has a left
side called debit, and a right side called credit.
- T account illustrated: Transactions can be summarized by recording receipts on
the left (debit) side, and payments on the right (credit) side.
- Footings: which are calculated at the end of the month, are an easy way to
determine cash on hand.
- Account balance: difference between total debit and total credit
- Rules of double-entry account: Every transaction affects at least two accounts,
and total debits must equal total credits.
- Assets = liabilities + owner’s equity.
- Debit assets increase credit owner’s equity/ liabilities increase
- Credit assets decrease debit owner’s equity / liabilities decrease
- Owner’s equity = Owner’s capital – withdrawals + revenues – expenses
- Withdrawals/ expenses increase owner’s equity decrease
- Normal balance: is its usual balance and is the side that increases the account.
