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Financial Accounting for Economists

Chapter 1: Accounting in Business
Explain the role of accounting in the information age.
• Accounting is an information and measurement system. It identifies, records,
and communicates relevant, reliable and comparable information about
business activities. Accounting also includes the crucial process of analysis
and interpretation
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Identify the users and uses of accounting information.
• There are two general types of users of accounting information. (1) Internal
users are managers and officers of businesses. They require information
about business activities in order to make decisions about planning,
monitoring, and control. (2) External users rely on financial statements to
make business decisions. These users include lenders, and shareholders.
Lenders need information for measuring the risk and return of loans.
Shareholders need information for assessing the risk and return in owning
shares.

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Explain why ethics are an integral part of accounting.
• The purpose of accounting is to provide useful information for decision
makers. For information to be useful, it must be trusted. This requires ethical
behavior by accountants and managers in all phases of gathering, analyzing
and reporting financial information so that good decisions are made.

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Describe the three important guidelines for revenue recognition.
• The three important guidelines for revenue recognition include: (1) Revenue is
recognized when earned. (2) Assets received from selling products and
services do not need to be in cash. (3) Revenue recognized is measured by
cash received plus the cash equivalent of other assets received.

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How does the ob&ectivity principle support ethical behavior?
• The objectivity principle supports ethical behavior since it requires that financial
information be documented by independent, unbiased evidence. Consequently,
the impact of belief and opinions on the recording and reporting of business
transactions and events is lessened.

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How does the going concern principle affect reporting asset values of a business?
• The going concern principle means that financial statements reflect an
assumption that the business continues in operation instead of being closed or
sold. Assets are therefore reported at cost rather than at liquidation value.

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Describe the relation bet0een revenues, expenses, and net income.
• Revenues are the increases in equity from a company's earnings activities.
Expenses are the costs of assets or services used to earn revenues. Net
income is the excess of revenues over expenses.

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What distinguishes liabilities from equity?
• Liabilities are creditors' claims on assets. They reflect obligations to transfer
assets or provide products or services to others. Equity is owner's claim to
assets. Equity is also called net assets or residual interest or net worth

and statement of cash flows. (2) financing.- Describe the three types of activities reported on the statement of cash flows. During the posting process the debit and credit amounts recorded in the journal are transferred to the individual accounts in the ledger. and net income over a period of time. Source documents are analyzed for the effects of the transactions and events on the accounting records. The purpose of the trial balance is to summarize the account totals and to verify the accuracy of . • The three types of activities reported in the statement of cash flows are (1) operating. credit card statements. The list is organized by debit and credit balances. expenses. Examples of source documents include checks. The income statement describes the company's revenues. - Identify and describe the four basic financial statements. which represent the cash inflows and outflows from the purchase and sale of long-term assets. and debit and credit amounts. and bank statements. • The four basic financial statements are the statement of financial position. The statement of cash flows reports on cash flows for operating. the account titles. investing. sales receipts. The statement of changes in equity explains changes in equity from net income or loss. - What is a trial balance? What is its purpose? • The trial balance is a list of all of the accounts in the ledger with balances at a point in time. and from issuance of shares and dividends over a period of time. The chart of accounts is a list of all of the accounts in the ledger that includes an identification number for the accounts. They can be in hard copy or electronic form - Explain the difference bet0een a ledger and a chart of accounts. The information is then posted to the accounts and a trial balance is prepared. which are the cash inflows and cash outflows related to owner investments and long-term borrowing and repaying cash from lending and (3) investing. The journal entries include the date. • A ledger is a record containing all of the accounts of a business and their balances. invoices. income statement (statement of comprehensive income). The statement of financial position describes the company's financial position and lists the types and amounts of assets. • Source documents are the sources of information that identify and describe transactions and events. The final step is the preparation of financial statements and reports for decision makers - Describe source documents and their purpose. liabilities. The information is recorded into the journal. • Information from business transactions and events is recorded in the journal in the form of journal entries. • Business transactions and events are the starting point. Fournal entries may also include a further description of the transaction. - Explain the recording and posting processes. statement of changes in equity. and equity at a point in time. which are the cash inflows and outflows from operations. and financing activities over a period of time Chapter 2: Analyzing and Recording Transactions List the steps in processing transactions. They provide objective and reliable evidence about transactions and their amounts.

• FOB stands for free on board . ownership transfers to the buyer when the goods depart the seller's place of business. A retailer is an intermediary that buys products from manufacturers or wholesalers and sells them to consumers - Describe the key attributes of inventory for a merchandising company. The seller is responsible for paying shipping costs and bears the risk of damage or loss in transit. The statement of financial position describes a company's financial position (assets. The buyer is then responsible for paying shipping costs and bearing the risk of damage or loss when goods are in transit. - What is the difference bet0een the periodic and perpetual inventory systems? • A periodic inventory system updates the inventory account only at the end of a period. - Describe the link between the income statement. • The steps are (1) cash purchases of merchandise (2) inventory for saleE (3) credit sales (4) accounts receivable (5) cash collection. including that from net income or loss. and the statement of financial position. The perpetual inventory system is increasing in popularity due to technological advances and competitive pressures - What does FOB stand for? Differentiate between FOB shipping point (or FOB factory) and FOB destination. and the seller records revenue at that time. Both statements report transactions occurring over a period of time. even if debits do equal credits this is no guarantee that no errors were made in recording and posting transactions. ownership transfers to the buyer when the goods arrive at the buyer's place of business. If goods are shipped FOB destination. The seller does not record revenue until the goods . liabilities. then the trial balance is out of balance which indicates an error in the accounting records. • Merchandise inventory is a current asset that represents products a company owns and intends to sell. Its costs include all necessary expenses to buy the inventory. Cost of goods sold is subtracted from net sales to get gross profit (also called gross margin). • The income statement reports a company's revenues and expenses along with the resulting net income or loss. The equity amount in the statement of financial position is obtained from the statement of changes in equity Topic 3: Corrections of Errors Identify and explain the key components of income for a merchandising company. • A wholesaler is an intermediary that buys products from manufacturers and sells to retailers or other wholesalers. • The basic components of income begin with net sales. If the total debits and credits are not equal. and equity) at a point in time. If goods are shipped FOB shipping point.the total debits and credits. A perpetual inventory system continually updates accounting records for merchandise transactions. Other expenses are then subtracted from gross margin to determine net income - Describe the difference between wholesalers and retailers. and make it ready for sale. ship it to the store. However. A statement of changes in equity reports changes in equity. the statement of changes in equity. - List the steps of the operating cycle for a merchandiser with credit sales.

human resource management. • Selling expenses include the expenses of promoting sales by displaying and advertising merchandise. and delivering goods to customers. Administrative expenses support a company's overall operations and include expenses related to accounting. and financial management .- - arrive at the destination because the transaction is not complete What is inventory shrinkage? How do managers account for shrinkage? • Inventory shrinkage is the loss of merchandise inventory due to theft or deterioration or similar phenomena. making sales. Distinguish between selling expenses and administrative expenses. Inventory shrinkage is typically added (debited) to the cost of goods sold and merchandise inventory is reduced (credited) for the amount of the shrinkage.