FINANCIAL ACCOUNTING LECTURE 1
Introduction of self
Go over MIP PPT Stressing Participation Points
How to study
1. Hear it
2. Write it
3. Read it
4. ASK QUESTIONS if you don’t understand it!
Users of Financial Statements
1. Managers
2. Stockholders
3. Bondholders
4. Security Analysts
5. Suppliers
6. lending institutions
7. employees
8. labor unions
9. regulatory agencies
10. general public.
They are NOT only required by law for public companies but more importantly are used to make decisions.
Generally Accepted Accounting Principles (GAAT)
1. Required by law (SEC in States)
2. Gives users of Financial Statements a common way to valuate a company
3. Sets up Financial Accounting Board (FASB)
The Conceptual Framework of FASB – 7 concepts:
1. Objectives of Financial Reporting by Business Enterprizes
a) intends to provide information that is useful in making business and economic decisions to all users of FSs
b) Reasonable users should be able to comprehend the business activities of the company by using due diligence in studying the FSs
c) Financial reporting should be helpful in determining amounts, timing and uncertainty of future cash flows
d) The primary focus is on earnings
e) Information MUST include the economic resources and claims against those resources.
2. Qualitative Characteristics of Accounting Information
a) Information must be useful in making decisions
b) It MUST be relevant – predictive in nature and timely
c) It MUST be reliable – can be verified and neutral in nature
d) It Must have comparability – give the ability to compare the information against information of another firm
e) Material information needs to be reported only – discussion on materiality
3. Elements of Financial Statements of Business Enterprises – replaced by concept 6
4. Objectives of Financial Reporting by non-business Organizations
5. Recognition and Measurement in Financial Statements of a Business Enterprize
a) Reports must be definable, measurable, relevant and reliable.
b) We use:
1) Historical Costs
2) Current Costs
3) Current Market Value (mark to the market)
4) Net realizable value (settlement value)
5) Present value (discounted value) of future cash flows
c) FSs should show:
1) Financial position at end of period – picture in time
2) Earnings (net income)
3) Comprehensive income – nonownwer change in equity
4) Cash flows
5) Investments by and distributions to owners
6. Elements of Financial Statements
a) Assets – what you own
b) Liabilities – what you owe
c) Equity = Assets – Liabilities
d) Investments by owners – how much they put in
e) Distributions to owners – how much they take out
f) Comprehensive income – a change in equity from a transfer of assets
g) Revenues – inflows
h) Expenses – outflows
i) Gains – a change in equity from transactions
j) Losses – a negative change in equity from transactions
7. Using Present Value in cash flow calculations both for receivables and payables.
Traditional Assumptions of the Accounting Model
1. Business Entity – a legal person
2. On-Going Concern – It will continue to live
3. Time Period – we measure in time
4. Monetary Unit – measured in a consistent unit of measurement – money talk
5. Historical Costs – most likely used
6. Conservatism – must select costs evaluation on least favorable to company – assume the worst.
7. Realization – when you recognize revenue
a) Point of Sale
b) End of Production
c) Receipt of Cash
d) During Production
e) Cost Recovery
8. Matching – match expenses to revenue
9. Consistency
10. Full Disclosure
11. Materiality
12. Industry Practices
13. Cash Basis versus Accrual Basis – do chart
1. sold inventory for $25,000 on credit this year. The merchandise costs $12,500 when purchased last year.
2. Purchased merchandise this year for $30,000 on credit
3. Paid suppliers of merchandise $18,000 this year
4. Collected $15,000 from sales.
HOW MUCH DID YOU MAKE?
Accural
Sales = $25,000 – on credit!
Costs = (12,500)
Income = $12,500
Cash
Receipts = $15,000 actual $ in
Exspenses = (18,000) actual paid out
Loss = (3,000)