October 4, 2011 Whats accounting?

? o Accounting- Recording, classifying, summarizing and interpreting of financial events and transactions in an organization to provide interested parties needed financial information. o Outside parties- like employees, owners, creditors, unions, investors and the government- make use of a firms accounting information. Managerial Accounting- Provides information and analysis to managers inside the organization to assist them in decision making. o Managerial accounting is involved with: Costs of production Costs of marketing Preparation and control of budgets Minimizing tax liabilities Financial Accounting- financial information and analyses are generated for people primarily outside the organization. Outside users are interested in these questions: o Is the organization profitable? o Is it able to pay its bills? o How much debt does it owe? Annual Report- A yearly statement of the financial condition, progress, and expectations of the firm. How to READ an ANNUAL REPORT o Key things to watch for and read: Managements discussion and analysis of operations Balance sheet Income statement Statement of cash flows Auditors opinion Public vs. Private Accountants o Private Accountants- Work in a single firm, government agency, or nonprofit organization. o Public Accountants- Provide accounting services to individuals or businesses. o Certified public accountants (CPAs) - Accountants who have passed a series of examinations established by the American Institute of Certified Public Accountants (AICPA) and met a states requirement for education and experience. Auditing- Reviewing and evaluating the information used to prepare a companys financial statements. Independent Audit- An evaluation and unbiased opinion about the accuracy of a companys financial statements. Specialized Accountants

Tax Accountants- Accountants trained in tax law and are responsible for preparing tax returns or developing tax strategies. o Government and Nor-for-Profit Accounting- Support for organizations whose purpose is not generating a profit, but serving others according to a duty approved budget. Accounting Cycle- a six step procedure that results in the preparation and analysis of the major financial statements. Bookkeepings Role o Bookkeeping- The recording of business transactions. Bookkeepers divide a firms transactions into meaningful categories and post them into a record book or computer program called a journal. o Double- Entry Bookkeeping- Bookkeepers record all transactions in two places so they can check one list of transactions against the other for accuracy. o Ledger- A specialized accounting book or program where all information is in one place. o Trial Balance- A summary of all the information in the account ledgers. Financial Statement- A summary of all the financial transactions that have occurred over a particular period. o Key financial statements of business are: Business sheet Income statement Statement of cash flows Fundamental Accounting Equation- The basis for the balance sheet. o The equation must always be balanced and includes the formula: Assets= Liabilities + Owners Equity Assets- Economic resources owned by a firm. Items can be tangible or intangible. Liquidity- Ease with which assets can be converted into cash. Classifying Assets o Current Assets- Items that can or will be converted to cash within one year. o Fixed Assets- Long-term assets that are relatively permanent such as land, buildings, or equipment. o Intangible Assets- Long-term assets that have no physical form but do have value such as patents, trademarks, and goodwill (the value of their reputation). Classifying Liabilities o Liabilities- What the business owes to others-its debts. o Accounts Payable- Current liabilities a firm owes for merchandise or services purchased on credit. o Notes Payable- Short or long-term liabilities a business promises to pay by a certain date. o Bonds Payable- long-term liabilities that the firm must pay back. Owners Equity Accounts o Owners Equity- The amount of the business that belongs to the owners minus any liabilities of the owners.

Retained Earnings- Accumulated earnings from the firms profitable operations that are reinvested in the business. Income Statement- The financial statement that shows a firms bottom line- that is, its profit after costs, expenses, and taxes. o The formula for the income statement: Revenue Minus cost of goods sold Equals gross profit Minus operating expenses Equals net income before taxes Minus taxes Equals net income or net loss Net Income/Net Loss- The revenue left over or depleted. Accounts of the income statement o Revenues is the monetary value a firm received for goods sold, services rendered or other payments. o Cost of Goods Sold (or manufactured)- Measures the cost of merchandise the firm sells or the cost of raw materials and supplies it used in producing items for resale. o Operating Expenses- Expenses a firm incurs in selling goods and services such as rent, salaries, and supplies. o Depreciation- The systematic write=off of the cost of a tangible asset over its estimate useful life. Assets= Liabilities+ Owners Equity The Income Statement: A financial report that shows an organizations profitability over a period of time. o Month o Quarter o Year The Balance Sheet: A snapshot of an organizations financial position at a given moment. o Presents an accumulation of al the companys transactions since it began. Statement of Cash Flow: Explains how the companys cash changed from the beginning of the accounting period to the end. o Three Categories: Cash from (used for) operating activities Cash from (used for) investing activities Cash from (used for) financing activities