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Chapter 1

Define accounting vocabulary

1.

Measures business activity Processes data into reports

2.
3.

Communicates results to decision makers

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End product of accounting process Report on business in monetary terms

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Define the users of financial information

Individuals

Businesses

Investors

Creditors

Taxing Authorities

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Financial Accounting

Managerial Accounting

Provides information for external decision makers

Provides information for internal decision makers

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Describe the accounting profession and the organizations that govern it

Lucrative career with many opportunities Certified Public Accountants (CPAs)


Pass qualifying exam Meet education and/or experience requirements

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FASB SEC AICPA IMA


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Investors & creditors want reliable financial information Companies want to attract investors

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SEC requires companies to have financial statements examined by CPAs Recent accounting scandals hurt investor confidence

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AICPA
Code of Professional Conduct

IMA
Standards of Ethical Conduct
Sets standards for private accountants

Guides CPAS in their work

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Identify the different types of business organizations

Proprietorships

Partnerships

Corporations

Limited Liability Companies


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Proprietorship Partnership

Corporation

LLC

Owners

One

Two or more

Stockholders usually many Indefinite

Members

Life of Organization Liability of owners for business debts

Limited by owners choice or death Owner is personally liable

Limited by owners choice or death Partners are personally liable

Indefinite

Stockholders not personally liable

Members are not personally liable

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Delineate the distinguishing characteristics and organization of a proprietorship

Separate Legal Entity

No Continuous Life Unlimited Liability of Owner


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Unification of Ownership and Management Business Taxation

Government Regulation

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Incorporators obtain charter from the state Charter authorizes corporation to:
Issue stock Conduct business in accordance with state law and the corporations bylaws

Corporations begins to exist when stock is issued

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Stockholders elect

Board of Directors who hire

Officers of the corporation

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Apply accounting concepts and principles

Generally Accepted Accounting Principles Goal:


To provide useful information to those making investment and lending decisions

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Entity Concept

Reliability

Cost

Going Concern

Monetary Unit

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Entity Concept
Reliability Cost

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Going concern Monetary Unit

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Define and use the accounting equation

Assets =

Liabilities + Owners equity

Economic Resources

Claims to Economic Resources


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Economic resources that have a future benefit

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Liabilities
Debts payable to outsiders

Owners equity
Owners claims to the assets of the business In a proprietorship owners equity

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Assets =

Liabilities + Owners equity

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Capital
+ Net income

Revenues

- Expenses

- Withdrawals

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Amounts earned by delivering goods or services to customers

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Outflows of assets or increasing liabilities in the course of delivering goods or services to customers

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Assets

Liabilities

Owners equity

Nice Cuts Love Dry Cleaners Hudson Gift and Cards

$? ? 85,000 102,000

$25,000 ? ? 49,000

$43,000 54,000 ??

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Assets

Liabilities

Owners equity

Nice Cuts Love Dry Cleaners Hudson Gift and Cards

$? $68,000 85,000 102,000

$25,000 ? 31,000 49,000

$43,000 54,000 ? 53,000

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Depict accounting for business transactions

An event that affects the financial position of a particular entity Can be recorded reliably Every transaction impacts at least two items The accounting equation balances before and after each transaction

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Assets Liabilities Accounts Accounts Date Cash receivable Supplies Land payable
Bal 2,500 1,500 0 13,000 4,000

Owners Equity Marilyn Mansion, Capital


13,000

Assets = $ ?

Liabilities & Equity = $?

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Date Cash Bal (a) Bal 2,500 10,000 12,500

Assets Accounts receivable Supplies


1,500 -

Land 13,000

Liabilities Accounts payable


4,000

Owners Equity Marilyn Mansion, Capital


13,000 10,000

1,500

13,000

4,000

23,000

Assets = $ ?

Liabilities & Equity = $?

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Assets Liabilities Accounts Accounts Date Cash receivable Supplies Land payable Bal (b) Bal 12,500 1,100 13,600 1,500 - 13,000 4,000

Owners Equity Marilyn Mansion, Capital 23,000 1,100 24,100

1,500

- 13,000

4,000

Assets = $ ?

Liabilities & Equity = $?

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Date Bal (c)

Cash 13,600 (4,000)

Accounts receivable 1,500

Supplies -

Land 13,000

Accounts payable 4,000 (4,000)

Marilyn Mansion, Capital 24,100

Bal

9,600

1,500
Assets = $ ?

13,000

24,100

Liabilities & Equity = $?

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Date Bal (d) Bal

Cash 9,600

Accounts receivable Supplies


1,500 700

Land 13,000

Accounts payable

Marilyn Mansion, Capital


24,100

700 13,000 700 24,100

9,600

1,500

700

Assets = $ ?

Liabilities & Equity = $?

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Date

Cash

Accounts receivable Supplies

Land

Accounts payable

Marilyn Mansion, Capital

Bal
(e) Bal

9,600
600 10,200

1,500
(600) 900

700

13,000

700

24,100

700

13,000

700

24,100

Assets = $ ?

Liabilities & Equity = $ ?

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Date Bal (f) Bal

Cash 10,200 1,700 11,900

Accounts receivable Supplies 900 700

Land 13,000

Accounts payable 700

Marilyn Mansion, Capital 24,100 1,700

900

700

13,000

700

25,800

Assets = $ ?

Liabilities & Equity = $?

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Date Bal

Cash 11,900

Accounts receivable Supplies 900 700

Land 13,000

Accounts payable 700

Marilyn Mansion, Capital 25,800

(g)
Bal 11,900

4,300
5,200 700 13,000 700

4,300
30,100

Assets = $ ?

Liabilities & Equity = $?

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Date

Cash

Accounts receivable Supplies

Land

Accounts payable

Marilyn Mansion, Capital

Bal
(h)

11,900
(1,000) (300)

5,200

700

13,000

700

30,100
(1,000) (300)

Bal

10,600

5,200

700

13,000

700

28,800

Assets = $ ?

Liabilities & Equity = $?

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Date Bal (i)

Cash 10,600 100

Accounts receivable Supplies 5,200 700 (100)

Land 13,000

Accounts Marilyn Mansion, payable Capital 700 28,800

Bal

10,700

5,200

600

13,000

700

28,800

Assets = $ ?

Liabilities & Equity = $ ?

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Date Bal (j) Bal

Cash 10,700 (2,200) 8,500

Accounts receivable 5,200

Supplies

Land

Accounts Marilyn Mansion, payable Capital 700 28,800 (2,200) 26,600

600 13,000

5,200

600 13,000

700

Assets = $ ?

Liabilities & Equity = $?

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Explain and prepare financial statements

Income Statement Statement of Owners Equity

Balance Sheet Statement of Cash Flows


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Reports on profitability of business

Revenues

minus

Expenses

equals

Net income

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Summary of changes in owners capital during a specific period


Beginning Capital Plus: Net income (or minus net loss) Less: Withdrawals Equals: Ending Capital

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Reports the entitys assets, liabilities, and owners equity as of a specific date
Balance Sheet
Liabilities

Assets

Equity

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Reports cash receipts and cash payments during a period

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Goth Inc. Income Statement Month ended September 30, 2011 Revenue: Service revenue Expenses: Rent expense Advertising expense Total expenses Net income $1,000 300 1,300 $4,100 $5,400

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Goth Inc. Statement of Owner's Equity Month ended September 30, 2011 Marilyn Mansion, Capital, September 1, 2011 Add: Investments by owner Net income

$13,000 11,700 4,100 $ 28,800 Less: Withdrawals (2,200) Marilyn Mansion, Capital, September 30, 2011 $ 26,600

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Goth Inc. Balance Sheet


September 30, 2011
Assets Cash Accounts receivable Supplies Land Total assets $8,500 Accounts payable 5,200 600 Owners Equity 26,600 27,300 Liabilities $ 700

13,000 Marilyn Mansion, Capital 27,300 Total liabilities & owners equity

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Use financial statements to evaluate business performance

Income Statement Revenues - Expenses = Net Income

Statement of Owners Equity Increased by Net Income Decreased by Withdrawals

Balance Sheet Assets = Liabilities + Equity


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Income Statement

Statement of Owners Equity

Balance Sheet

Demonstrates profitability

Shows changes in Capital

Displays financial position

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