Textbook Summary of Corporate Financial Accounting 10e, Ch 1, by Warren/Reeve/Duchac.
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Generally Accepted Accounting Principles (GAAP) allow investors and other users to compare one company to another.
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Financial Accounting Standards Board (FASB) has the primary responsibility for developing accounting principles and publishes Statements of Financial Accounting and Interpretations of these standards.
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The Securities Exchange Commission (SEC), a US government agency, has authority over accounting and financial information for companies whose shares of stock are traded and sold to the public.
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SEC follows the FASB guidelines but may issue Staff of Accounting Bulletins to address accounting matters FASB did not include.
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International Accounting Standards Board issues International Financial Reporting Standards (IFRS) which is different from the FASB.
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They're working together to develop a set of worldwide accounting principles to facilitate investment and business in a global economy.
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Assets
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Resources owned by a business:
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- cash
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- land
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- buildings
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- equipment
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Rights are divided into 2 types:
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- rights of the creditors (liabilities)
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- rights of the owners (owner's equity)
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Accounting equation showing the relationship among all 3 variables:
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Asset = Liability + Owner's Equity
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Liabilities are shown before owner's equity because creditors have first rights to the assets.
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BUSINESS ENTITY CONCEPT
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Shows the economic data in an accounting system directly related to the business ONLY and does not include personal activities, properties and debts by the owner.
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A business entity can take the form of a proprietorship, partnership, corporation or limitedliability company (LLC).
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Proprietorship
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- own by one individual
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- easy and cheap to organize
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- resources are limited to owner
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- used by small businesses
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Partnership
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- own by two or more individuals
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- combined skills and resources
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Corporation
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- a separated legal tax entity
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- generates 90% of business revenues
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- ownership divided into shares (stock)
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- obtain resources by issuing stock
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- used by large businesses
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Limited liability company (LLC)
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- combines partnership & corporation
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- used as alternative to partnership
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- tax and legal liability advantages
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COST CONCEPT
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Amounts are recorded in accounting records at their cost or purchase price.
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The cost concept includes the objectivity and unit of measure concepts.
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objectivity concept requires the amount be based upon objective evidence where the final agreed upon amount has been established.
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Revisions upward/downward on offers, appraisals and opinions can make the accounting report unstable or unreliable.
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unit of measure concept requires the economic data be recorded in dollars.
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Business transactions are defined as an economic event or condition that DIRECTLY changes an entity's financial condition or even it's operations.
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Changes in business credit rating does not directly affect cash or any other asset, liability or owner's equity amount.
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All business transactions can be stated in terms of changes in the elements of the accounting equation.
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Summary of Transactions
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- effect is either an increase (+) or decrease (-) in the equation elements
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- the two sides are always equal
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- stockholder's equity is increased (+) by amounts invested by stockholders
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- stockholder's equity is increased (+) by revenues and decreased (-) by expenses
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- stockholder's equity is decreased (-) by dividends paid to stockholders
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Stockholder's Equity
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- Capital Stock
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- Retained Earnings
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Capital stock is shares of ownership distributed to investors of corporations.
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Retained earnings is the stockholder's equity created from business operations through revenue and expense transactions.
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Both transactions are reported separately from each other
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Also see the Nature and Business of Accounting for use in conjunction with this sheet http://www.cheatography.com/thuhuong/cheat-sheets/nature-of-business-and-accounting/.
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