Ch 1- Fin ACCT
Accounting is an info system to record + summarize the bus. activities of a
company
Typical Bus. Cycle for Boeing= Generate Rev + Economy
1. Purchase Parts +Labor
2. Manufacture products
3. Sell products to customers
4. Collect $$ from customers + Pay creditors
GAAP(Generally Accepted Accounting Principles)- External Fin. Statements
are prepared according to GAAP
FASB(Financial Accounting Standards Board)-Are responsible=GAAP
SEC(Securities+ Exchange Commission)- Work w/FASB on GAAP
IFSR(International Financial Reporting Standards)- The standards used by
public companies in other countries.
AICPA(American Institute of Certified Public Accountants)-Requires that all
its member adhere to a Code Of Prof Conduct + to help ensure decisions are
made in a prof + ethical manner
PCAOB(Public Company Accounting Oversight Board)- Auditors who report
whether(beyond reasonable doubt), the Finan. Statement represent what
they claim to represent + whether they comply w/ GAAP
Bus. Entities: Sole Proprietorship vs Partnership vs Corporation
- Sole Prop- Owned by one-person Ex: Small Business
- Partnership- Owned by two or more people(Partners) Ex: Law Firm
- Corporation- Under law of particular state. Owners=Stockholders. Limited
Liability. Public=Need to provide financial info to external users. Publicly
listed companies(Have stock) must be a corporation
Accounting System: Financial Info is reported to decision makers in two ways:
1. Managerial Acct.- For Managers(Internal)
2. Financial Acct- For Investors, Creditors, Gov., Board of Dir(External)
Asset- Economic resources controlled by a entity which will bring future
benefits. Ex: $$, Equipment, etc.
Liability- Obligations of an entity. May transfer. Will be fulfilled be
providing assets or service. Ex: Payable
Shareholder’s Equity- Is the residual of Assets-Liabilities. The $ provided by
owners. Ex: Common Stock, Paid-on Capital, Retained Earning
Income Statement(R-E=NI),Retained Earning.(NI-DIV=R.E.),
Statement of Cash Flow- Summarizes bus’s operat., invest., financial activities
CH 2-4(Acct. cycle, Balance Sheet, Accrual Acct., Adjustments)
Acct. Cycle= Record Transact, Adjust for Accruals+ Prepare Finan. Statements
1. Identify transaction, 2. Journalize transaction, 3.Post journals to T-
accounts, 4. Unadjusted trail balance, 5. Journalize + post adjusting
journal entries(AJEs), 6. Adjusted trail balance, 7. Prepare finan.
statements, 8. Journal + post-closing entries, 9. Post-closing trail balance
Transaction- An exchange of $/g/s between a firm + another party (1)
Ex: Journal Entry(Unadjusted)- Sept 1st Dr. Office Supplies(A+). 600
Cr. Account Payable (L+) 600 (2)
Why do we need Journal Entries?- 1. Keep track of each transaction, 2. Make
sure that Debit=Credit, 3. Easier to identify any errors(If audit) (3)
Unadjusted trail balance- Sum the debits + credit of each T-account(4)
Balance Sheet Classifications- Assets, Liability + Stockholder’s equity
1. Asset- Currents ($$, Supplies, Account Rec, etc) + Long-
term(Investments, Property, Equipment, Furniture, etc)
2. Liabilities- Current (Account Payable… Anything that has Payable)+
Long-term debt(Bank loan payable, etc)
3. SH’s Equity- Common stock, Pain-in Capital +Retained Earning
D.E.A.L.- Dividends, Expenses, and Assets increase on the Left
Recognition Criteria =Recorded When ___
Accrual Basis (Required by GAAP) Cash Basis(Not allowed by Ga
Revenue When earned When $ is received
Expense When incurred When $ is paid
Accrual Acct- Recognizes the impact of transactions/event on Assets,
Liabilities, Rev, Exp, etc. in the period when those effects actually occur,
not necessarily when $$ is paid/received. Public companies use Accrual.
-Recognize Rev/Exp when transaction occur, not when $ flow are received.
3 scenarios: 1. G/S exchange first(Recognize R/E + Create Receiv/Payable), $
flow later(Record $ flow+ Reduce Receiv/Payable)Ex: Issuing a bill
2. $ flow + G/s exchange occurs at the same time(Record $ flow +
Recognize Rev/Exp)
3. $ flow first(Record cash flow+ Create Prepaid/Unearned), G/S
later(Recognize Rev/Exp + Reduce Prepaid/Unearned)Ex: Insurance
Accounts(Income State): Rev, N.I.  , R.E.(S.E) ; Exp, N.I., R.E.(S.E) 
Rev Recognition when:1. Sales of Product occurred/service provided, 2.
Transaction price can be determined, 3. Evidence of arrangement for
payment + 4. Cash collection is assured(Need all 4 to recognize Rev)
Exp Recognition: Recognize Exp in the same period as Rev. Ex: Depreciation
Exp. Matching Principle=Resource used to earn Rev should be reported in
the same period as Rev
Accrual(Recognize Rev/Exp first with G/S, Cash flow later)vs Deferral(Cash
flow first(Prepaid/Unearned),Recog Rev/Exp later when G/S are exchanged)
Why so we need Adjustments?- 1. Unadjusted trail balance may not show
the correct balance+ need adjusting entries, 2. Some changes are not
reflected when recording daily transactions(Values changes over time)
Type of Adjusting Entries: A. Deferrals(Prepayment)($  action)(A1. Prepaid
Exp, Supplies + Depreciations(For Equipment, Land,etc) + A2. Unearned Rev)
+ B. Accrual(action $)(B1. Accrued Exp + B2. Accrued Rev)
A1. Record Asset, as time pass  Exp (IJE) Dr. Prepaid Insur(A+) 600
Ex: Prepaid Rent + Insurance Cr. Cash(A-) 600
(So for AJE, Input Exp first then (AJE) Dr. Insurance Expense(E+,SE+) 50
Credit the OG debit) Cr. Prepaid Insurance(A-) 50
Ex: (IJE) Dr. Office Supplies(A+) 2500 (AJE) Dr. Supplies Exp(E+,SE-) 1500
(What is spent) Cr. Cash(A-) 2500 Cr. Office Supplies(A-) 1500
Ex: (IJE) Dr. Equipment(A+) 5000. (AJE)Dr. Depreciation Exp(E+) 40
Cr. Cash(A-) 5000 Cr. Accumulated Depre. 40
A2. Record Liability, Recognize Rev when G/S is exchange/provided(Earned
Ex: (IJE) Dr. Cash(A+) 1200 (AJE) Dr. Unearned Rev(L-) 400
Cr. Unearned Rev(L+) 1200 Cr. Service Rev(R+, SE+) 400
B1. Incur Exp first, pay $ later(Recog Exp=Matching Principles)Ex: Utilities
Exp, Salaries Exp + Interest Exp (Ex below)
Ex:(IJE) Dr. Cash (A+) 5000 (AJE) Dr. Interest Exp(E+,SE) 50
Cr. Note Payable(L+) 5000 Cr. Interest Payable(L+) 50
B2. Recognize Rev when performed(Earned) Provide G/S first, Receive $ later
Ex: Earned $200 interest from investment(AJE) Dr. Interest Receiv 200
Cr. Interest Rev. 200
Why do need we need adjusting entries(Other)?- 1. To make sure
Rev/Exp/Asset/Liabilities/Dividends are at the correct ending balance, 2. Perpetual
Inventory System, 3. Asset Revaluation+ 4. Error Correction
Wrap-Up(Adjusting Entries)- Are needed when action affect more than 1
acct. periods, 2.Occur at the end of an acct. period. 3. Most involve I/S
account(Rev + Exp) and B/S account(Asset + Liability)+ 4. NEVER involve $$$
Closing Entries- Need to close out Rev, Exp + Dividends account(Temporary
Account) to Retained Earnings
Cash + Cash Equivalents- Cash is most liquid asset + more than just cash.
Equivalents: High Liquid(Little risk of price fluctuation)= 1. Treasury Bill
(Short-term Loan for Gov), 2. Guaranteed Investment certificates(Spon. By
Bank) + 3. Money-Market Funds…Low Liquid/High risk=Subprime-mortgage
Internal Control of Cash should: 1. Segregate custody of cash from acct. for
cash, 2. Restrict/Limit access to cash to few people, 3. Account for all cash
transaction in a timely basis + 4. Bank Reconciliation(T-account + accounts)
Toshiba- Involved a $1.7 billion scheme to conceal investment losses. Had overstated
Rev for the two decades. CEO +Executives stepped down
Enron- Was super stable company. Fraud in Rev recognition(Exp=Rev)+ debt
presentation(Transfer L to special a)Executive=Jail. Sarbanes- Oxley Act(SOX)- Reduce
fraud opportunities +enhance companies’ internal control over financial reporting.