Introducing Financial Accounting - CCSN Computer Graphics Program

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Operating Operating activities involve using resources to
research, develop, purchase, produce, distribute, and market
products and services. Sales and revenues are the inflow of assets
from selling products and services. Costs and expenses are the
outflow of assets to support operating activities. Strategic management
is the process of determining the right mix of operating
activities for the type of organization, its plans, and its market.
Exhibit 1B.1 summarizes business activities. Planning is part
of each activity and gives them meaning and focus. Investing
(assets) and financing (liabilities and equity) are set opposite
each other to stress their balance. Operating activities are below
investing and financing activities to show that operating activities
are the result of investing and financing.
Summary
C1
Chapter 1 Introducing Financial Accounting 27
Planning
Planning
A Summary organized by learning objectives concludes each chapter.
Explain the purpose and importance of accounting. Accounting
is an information and measurement system that
aims to identify, record, and communicate relevant, reliable, and
comparable information about business activities. It helps assess
opportunities, products, investments, and social and community
responsibilities.
Identify users and uses of, and opportunities in, accounting.
C2 Users of accounting are both internal and external. Some users
and uses of accounting include (a) managers in controlling, monitoring,
and planning; (b) lenders for measuring the risk and return of
loans; (c) shareholders for assessing the return and risk of stock;
(d) directors for overseeing management; and (e) employees for
judging employment opportunities. Opportunities in accounting
include financial, managerial, and tax accounting. They also include
accounting-related fields such as lending, consulting, managing,
and planning.
Explain why ethics are crucial to accounting. The goal of
C3 accounting is to provide useful information for decision making.
For information to be useful, it must be trusted. This demands
ethical behavior in accounting.
Explain generally accepted accounting principles and de-
C4 fine and apply several accounting principles. Generally accepted
accounting principles are a common set of standards applied
by accountants. Accounting principles aid in producing relevant, reliable,
and comparable information. Four principles underlying financial
statements were introduced: cost, revenue recognition, matching,
and full disclosure. Financial statements also reflect four assumptions:
going-concern, monetary unit, time period, and business entity.
B Identify and describe the three major activities of
C5 organizations. Organizations carry out three major activities:
financing, investing, and operating. Financing is the means used to
Guidance Answers to Decision Maker and Decision Ethics
Entrepreneur You should probably form the business as a corporation
if potential lawsuits are of prime concern. The corporate form
of organization protects your personal property from lawsuits directed
at the business and places only the corporation’s resources at
risk. A downside of the corporate form is double taxation: The corporation
must pay taxes on its income, and you normally must pay taxes
Best Buy Stock
Invoice Invoice
Bill Bill
Lones
Planning
EXHIBIT 1B.1
Activities of Organizations
pay for resources such as land, buildings, and machines. Investing
refers to the buying and selling of resources used in acquiring and
selling products and services. Operating activities are those necessary
for carrying out the organization’s plans.
Define and interpret the accounting equation and each
A1 of its components. The accounting equation is: Assets 5 Liabilities
1 Equity. Assets are resources owned by a company. Liabilities
are creditors’ claims on assets. Equity is the owner’s claim
on assets (the residual). The expanded accounting equation is:
Assets 5 Liabilities 1 [Common Stock 2 Dividends 1
Revenues 2 Expenses].
Compute and interpret return on assets. Return on assets is
A2 computed as net income divided by average assets. For example,
if we have an average balance of $100 in a savings account and it
earns $5 interest for the year, the return on assets is $5/$100, or 5%.
A Explain the relation between return and risk. Return refers
A3 to income, and risk is the uncertainty about the return we
hope to make. All investments involve risk. The lower the risk of an
investment, the lower is its expected return. Higher risk implies
higher, but riskier, expected return.
Analyze business transactions using the accounting equa-
P1 tion. A transaction is an exchange of economic consideration
between two parties. Examples include exchanges of products, services,
money, and rights to collect money. Transactions always have
at least two effects on one or more components of the accounting
equation. This equation is always in balance.
Identify and prepare basic financial statements and explain
P2 how they interrelate. Four financial statements report on an
organization’s activities: balance sheet, income statement, statement
of retained earnings, and statement of cash flows.
on any money distributed to you from the business (even though the
corporation already paid taxes on this money). You should also examine
the ethical and socially responsible aspects of starting a business
in which you anticipate injuries to others. Formation as an LLC or
S corp. should also be explored.