ACCT 2210

Intro & Chapter 1

Dr. Laura Lachmiller
Fall 2023
 Ask Me Anything….

Assume that you are

considering going into
business with Fred and
Linda Wilson. Assume that I
am Fred and Linda’s
accountant and that you
can ask me three questions.
Write down the three
questions that you would
ask.
Chapter 1
What is Accounting?

Process of identifying,
measuring, and communicating
financial information and
economic activities about a
business to interested users.
Types of Accounting
Information
 Financial Accounting information
 Users: creditors, investors, government agencies,
stakeholders, etc.
 Communicates information that is external to company
 Managerial Accounting information
 Users: company employees, managers
 Communicates information that is internal to company
What is Accounting?

Process of identifying,
measuring, and communicating
financial information and
economic activities about a
business to interested users.
What is Accounting?

Process of identifying,
measuring, and communicating
financial information and
economic activities about a
business to interested users.
Transactions = events that change a firm’s financial
position
What is Accounting?

Process of identifying,
measuring, and communicating
financial information and
economic activities about a
business to interested users.

• Attach a $ amount to transactions identified & record them

• $ = measuring stick
• Initially record transactions at historical cost
• Two methods to record transactions – Cash basis and accrual
basis (Ch. 2)
What is Accounting?

Process of identifying,
measuring, and communicating
financial information and
economic activities about a
business to interested users.

Financial Statements (4 major statements required)

Measurement Principles

 Found in GAAP (Generally Accepted Accounting

Principles)
 What is GAAP? Financial accounting rules that are
used to identify, measure and communicate
financial information
 Set by Financial Accounting Standards Board (FASB)
 Group of accountants that establish GAAP
 Given authority to set GAAP by SEC (Securities and
Exchange Commission)
Elements of Financial
Statements
 Represent broad categories of the financial
statements (information in financial statements is
organized into ten categories)
 Assets, Liabilities, Equity, Contributed Capital,
Revenue, Expenses, Distributions, Net Income,
Gains, Losses
 Sub-classifications of the elements are frequently
called accounts
 Building an Accounting
Equation Model
Assets = resources of the business to make money

How does a business obtain resources? There are 3 ways:

1) Through borrowing assets
 Liabilities = obligations a business has to creditors (borrowing assets)
Claims

Equity =
2) Through owners/investors represents
ownership
within a
company
3) Through operations
 Increases in assets through operations are called income or earnings
 Decreases in assets through operations are called losses
 Distribution of assets generated through operations are called dividends
Building an Accounting
Equation Model
Assets = Claims

Referred to as the
Assets = Liabilities + Equity accounting equation

Common Stock Retained Earnings

Types of Transactions

 Asset Source transactions

 Businesses obtain assets through variety of sources (see
accounting equation slide)
 Increase total assets and total claims
 Asset Exchange transactions
 Businesses trade one asset for the other often
 One asset decreases, and one asset increases
 Total assets do not increase
 Asset Use transactions
 Businesses uses assets for a variety of purposes
 Decrease total assets and total claims
Income Statement (I/S)
 Shows the results of operations for
a period of time.
 Model:

Revenues – Expenses = Net

Income
Statement of Stockholder’s
Equity (SSE)
 Explainsthe changes in the
stockholder’s equity accounts for a
period of time.
 Model:

Beg. SE + Inflows – Outflows = End. SE

Balance Sheet (B/S)
A picture of a company’s
financial position at a particular
date (presents a company’s
“accounting equation”)
 Model:

Assets = Liabilities + Stockholder’s

Equity
Statement of Cash Flows (SCF)
 Explains the changes in the cash account for a period of
time.
 Cash transactions are grouped into three categories:
 Operating Activities: cash transactions involving inflows and
outflows from revenues and expenses (operations)
 Investing Activities: cash transactions involving inflows and
outflows regarding long-term assets (investments)
 Financing Activities: cash transactions involving inflows and
outflows regarding creditors and owners (NOTE: interest
expense associated with borrowing is an operating activity, not
a financing activity!)
 Statement of Cash Flows (SCF)
Model:

Total Cash flows from operating activity transactions

+/- Total Cash flows from investing activity transactions
+/- Total Cash flows from financing activity transactions
= Change in cash during the period
+ Beginning cash balance
= Ending cash balance
Building an Accounting
Equation Model
Assets = Claims

Referred to as the
Assets = Liabilities + Equity accounting equation

Common Stock Retained Earnings

Revenues - Expenses - Dividends

Net Income
Relationship of Financial
Statements
 The IS, SSE, and SCF are “flow statements” because
they show what flowed through the B/S accounts during
the period.
 Transactions affecting the IS also affect the B/S.
 For the B/S to balance (A = L + SE), IS transactions must
be reflected in the Retained Earnings account of SE.
 The SSE explains what changed in the equity accounts
during the period.
 The SCF explains why the cash amount on the B/S
changed during the period.
 Relationship of Financial
Statements
Beginning B/S Changes in B/S Ending B/S
amounts amounts
amounts

IS
SSE
SCF
Closing Process
 Transfers net income (or loss) and dividends to Retained
Earnings
 Establishes zero balances in all revenue, expense, and
dividend accounts (temporary accounts)
 Permanent accounts – assets, liabilities, equity (track
financial results from year to year)
 Note: See Horizontal Model – as each transaction was
filled in, the “closing process” was taking place by
transferring all revenue, expense, and dividend amounts
to retained earnings account