ACC 342 Lecture Notes - Lecture 2: Financial Accounting Standards Board, International Accounting Standards Board, Limited Liability
financial statements
business documents that companies use to report the results of their activities to various user groups
which can include managers, investors, creditors, and Regulatory Agencies. measure performance and
communicate where a business stands in financial terms.
Net income
profit, the excess of revenues (net sales) over expenses
Accounting
is an information system. It measures business activities, processes data into reports, and communicates
results to decision makers. "Language of business" the better you understand the language, the better
you can manage your finances and those of your business.
Accounting cycle
process by which a company's financial statements are prepared.
Financial accounting
Provides information for decision makers outside the entity, such as investors, creditors, government
agencies, and the public. This information must be relevant for the needs of decision makers and must
faithfully give an accurate picture of the entity's economic activities.
Management accounting
Provides information for managers of The Walt Disney Company. Examples of management accounting
information include budgets, forecasts, and projections that are used in making the strategic decisions
of the entity. Internal information must still be accurate and relevant for the decision needs of
managers.
Types of business
Proprietorship, Partnership, Limited-liability company (LLC), Corporation
Proprietorship
Single owner, called the proprietor. Tend to be small retail stores, physicians, attorneys, artists or
accountants. For accounting purposes, a proprietorship is a distinct entity, separate from its proprietor.
Business records should not include the proprietor's personal finances.
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Partnership
Has two or more parties as co-owners, and each owner is a partner. Individuals, corporations,
partnerships, or other types of entities can be partners. Income and losses of the partnership "flow
through" to the partners, and they recognize them based on their agreed-upon percentage interest in
business. It is not a tax paying entity, instead, each partner takes a proportionate share of the entity's
taxable income and pays tax according to that partner's individual or corporate rate.
Have mutual agency and unlimited liability, meaning each partner may conduct business in the name of
the entity and can make agreements that legally bind all partners without limit for the partnership's
debts but are risky because an irresponsible partner can create large debts for the other general
partners without their knowledge or permission.
Limited-Liability Partnership (LLP)
a wayward partner cannot create a large liability for the other partners. Each partner is liable for
partnership debts only up to the extent of his or her investment in the partnership. Each LLP must have
one general partner with unlimited liability for all partnership debts.
Limited-Liability Company (LLC)
Where the business (and not the owner) is liable for the company's debts. May have one owner or many
owners called members. Unlike a proprietorship or general partnership, the members of the LLC do not
have unlimited liability for the LLC's debts. LLC pays no business income tax, income "flows through" to
the members, and they pay income tax at their own tax rates just as they would if they were partners.
Today, many multiple-owner businesses are organized as LLC's, because members of an LLC effectively
enjoy limited liability while still being taxed like members of a partnership.
Corporation
A business owned by stockholders or shareholders who own stock representing shares of ownership in
the corporation.
Advantage of corporate form is ability to raise large sums of capital from the issuance of stock to the
public.
Unlike proprietorship's and partnerships, a corp is legally distinct from its owners.
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stockholders have no personal obligation for the corps debts, but a corp pays a business income tax and
many other types of taxes.
Generally accepted accounting principles(GAAP)
Accounting guidelines, formulated by the financial accounting standards board, that govern how
accounting is practiced
material
information that must be important enough to the informed user so that, if it were omitted or incorrect,
it would make a difference in the users decision.
to make a faithful representation, the information must be complete, neutral (free from bias), and free
from error (accurate). Accounting information must focus on the economic substance of a transaction,
event, or circumstance, which may or may not always be the same as its legal form.
Conceptual Foundation of Accounting
Objective: to provide financial information about the reporting entity that is useful to existing and
potential investors, lenders, and other creditors in making decisions about providing resources to the
entity
Fundamental qualitative characteristics: Relevance (includes materiality) and faithful representation.
Enhancing qualitative characteristics: Comparibility, verifiability, timeliness, understandability
Constraints: Cost
Financial reporting standards
Financial Accounting Standards Board (FASB)
...
International Accounting Standards Board (IASB)
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