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Chapter 1

Review of Learning Objectives

LO1Define accounting and explain its role in making informed decisions, identify business goals and activities, and explain the importance of ethics in financial reporting.

Accounting is an information system that measures, processes, and communicates financial information about an economic entity. It provides the information necessary to make reasoned choices among alternative uses of scarce resources in the conduct of business and economic activities.  A business is an economic entity that engages in operating, investing, and financing activities to achieve the goals of profitability and liquidity.

Management accounting focuses on the preparation of information primarily for internal use by management. Financial accounting is concerned with the development and use of reports that are communicated to those outside the business as well as to management. Ethical financial reporting is important to the well being of a company; fraudulent financial reports can have serious consequences for many people.

LO2Identify the users of accounting information.

Accounting plays a significant role in society by providing information to managers of all institutions and to individuals with a direct financial interest in those institutions, including present or potential investors and creditors. Accounting information is also important to those with an indirect financial interest in the business—for example, tax authorities, regulatory agencies, and economic planners.

LO3Explain the importance of business transactions, money measure, and separate entity.

To make an accounting measurement, the accountant must determine what is measured, when the measurement should be made, what value should be placed on what is measured, and how to classify what is measured. The objects of accounting measurement are business transactions . Financial accounting uses money measure to gauge the impact of these transactions on a separate business entity.

LO4Describe the characteristics of a corporation.

Corporations, whose ownership is represented by shares of stock, are separate entities for both legal and accounting purposes. The stockholders own the corporation and elect the board of directors. The board is responsible for determining corporate policies and appointing corporate officers, or top managers, to operate the business in accordance with the policies that it sets. The board is also responsible for corporate governance, the oversight of a corporation’s management and ethics. The audit committee, appointed by the board and made up of independent directors, is an important factor in corporate governance.

LO5Define financial position, and state the accounting equation.

Financial position refers to a company’s economic resources and the claims against those resources at a particular time. The accounting equation shows financial position as Assets

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