Intermediate One, Chapter One Notes Essay

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Intermediate Accounting Chapter One
• 1984 Michael Dell of the University of Texas created PC’s Limited. The company manufactured computers after it has been ordered, otherwise known as just-in-time (JIT) approach.
• In 1985 PC’s Limited began with $1,000 from Michael, $300,000 in expansion capital, and the revenue topped $73 million.
• The company was later renamed Dell Inc. which in January 2011, exceeded $2.6 billion in profits and $61 billion in revenue. In 1988 an initial public offering of the company’s stock provided $30 million in equity financing.
• Financial Accounting- is chiefly concerned with providing relevant financial information to various external users. Primary focus of financial accounting is on the financial information provided by profit-oriented companies to their present and potential investors and creditors.
• Financial intermediaries, includes financial analysts, stockbrokers, mutual fund managers, and credit rating organizations.
• Balance sheet = statement of financial position
• Income statement = statement of operations
• Statement of cash flows
• Statement of shareholder’s equity
• In 2012 companies must either provide a statement of other comprehensive income immediately following the income statement, or present a combined statement of comprehensive income that includes the information normally contained in both the income statement and the statement of other comprehensive income.
• Financial reporting refers to the process of providing this information to external users.
• Capital markets provide a mechanism to help our economy allocate recourses efficiently.
• Corporations acquire capital from investors in exchange for ownership interest and from creditors by borrowing.
• Initial market transactions involve issuance of stocks and bonds by the corporation.
• Secondary market transactions involve the transfer of stocks and bonds between individuals and institutions.
$400 dividends + $600 share price appreciation / $10,000 initial investment = 10% rate of return
• A company will be able to provide a return to investors and creditors only if it can generate a profit from selling its products or services.
• The objective of financial accounting is to provide investors and creditors with useful information for decision making.
• Cash basis accounting produces a measure called net operating cash flow. This is the difference between cash receipts and cash payments from transactions related to providing goods and services to customers during a reporting period.
• Net operating cash flow is the difference between cash receipts and cash disbursements from providing goods and services.
• Over short periods of time, operating cash flow may not be an accurate predictor of future operating cash flows.
• Accrual accounting model’s measure of recourses provided by business operations is called revenues, and the measure of sacrificed to earn revenues is called expenses. The difference between the two is net income.
• Net income is considered a better indicator of future operating cash flows than is current net operating cash flow.
• Accrual accounting is the financial reporting model used by the majority of profit-oriented and many not-for-profit companies.
• General accepted accounting principles (GAAP) is a dynamic set of both broad and specific guidelines that companies should follow when measuring and reporting the information in their financial statements and related notes.
• Accounting standards began to surface after the stock market crash of 1929.
• 1933 Securities Act and the 1934 Securities Exchange Act were designed to restore investor confidence. The 1933 Act sets forth accounting and disclosure requirements for initial offerings of securities (stocks and bonds). The 1934 Act applies to secondary market transactions and mandates reporting requirements for companies whose securities are publicly traded on either organized stock exchange or in over-the-counter
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