Lesson Overview

We're all familiar with many types of businesses: service businesses, such as attorney firms; retail businesses, such as department stores; manufacturing businesses, such as automakers; and financial businesses, such as credit card companies. Many companies combine activities—for example, providing services as well as making or selling products—as restaurants and beauty salons do. There is enormous variety in company activities. But one thing all types of businesses have in common is an accounting system: a consistent way to keep track of financial transactions and report the company’s financial condition to those who use this information.

The accounting system that U.S. companies typically use is based on Generally Accepted Accounting Principles, or GAAP, which have evolved over time—many centuries, in fact. GAAP does not dictate the exact accounting procedure for every business activity, but rather provides guidelines for company managers to use in tracking financial information. The common business transactions covered in this course are accounted for in a standard way, and a company’s financial information is collected and reported on four standard financial statements: the balance sheet, the income statement, the statement of changes in shareholders’ (owners’) equity, and the statement of cash flows.

In this lesson, you will consider the types of financial information generated by a business, and who uses that information. You will also be introduced to GAAP guidance and the conceptual framework underlying financial reporting. In addition, you will become familiar with the four basic financial statements and the information reported on each.

Learning Objectives

After completing this lesson, you should be able to do the following:

• Identify the internal and external stakeholders who are interested in a company’s financial information.
• Identify the general characteristics of financial information reported in accordance with GAAP, as outlined in the FASB’s conceptual framework.
• Name the four basic financial statements, and discuss the elements contained in each.
• Calculate retained earnings, and demonstrate how it relates to stockholders’ equity.
• Create a balance sheet, income statement, and statement of stockholders’ equity, given basic company financial data.

Lesson Readings & Activities

By the end of this lesson, make sure you have completed the readings and activities found in the Course Schedule.