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Notes – B01.1306 - 1-30-02
SEC – Securities and Exchange Commision – a federal government agency in charge of setting accounting principles. The commission has delegated the responsibility to the FASB.
FASB – Financial Accounting Standards Board – a private rule making body designated by the SEC to make accounting rules and regulations. They accept the procedures of the AICPA as part of the rules and regulations.
AICPA – American Institute of Certified Public Accountants.
GAAP – Generally Accepted Accounting Principles – the basis for the rules of financial reporting.
Accounting – an information system using dollars to describe business events and to measure a company’s business condition.
Accounting – a double entry system – every business event is described in two ways.
Fiscal year – a continuous 12 month period (not necessarily the calendar year)
Parts of the financial statement issued annually by a company.
Management letter
Management discussion of its financial position
Financial statements including
Balance sheet – shows the company’s current financial position
Income statement – shows the company’s performance during the past fiscal year
Cash flow statement – shows changes in the company’s cash position during the past fiscal year.
Explanatory notes – provide added detail about the company’s condition
Assets = Liabilities + Shareholders’ equity – an equality that must always hold.
Or
What you own = what you owe + a residual or leftover
A different view
Shareholders’ equity = Assets – Liabilities or
Leftover or Residual = Own – Owe
What makes an asset?
An asset is an asset if:
The user has control over the use of the asset and
The value of the asset is quantifiable and
The benefits in the asset are in the future
Inventory – an asset that the company has in order it to sell to consumers. (For example, the GAP has clothing to sell to consumers.)
Shareholders' equity = Stockholders' equity = Owners' equity
An asset can be recorded only if you have ownership or control of its use AND the value of the asset is quantifiable AND if the asset can be used beneficially in the future.
Current assets - assets that are used within one year
Examples include cash, receivables, inventory and prepaid rent
Long-term assets - assets that will be used up over a period exceeding one year.
Examples include land, buildings and machinery or equipment. Another example is a long-term investment in another company.
Total assets = current assets + long-term assets
Some important assets are not recorded as asses. Some examples are employee training, internally developed trademarks (such as Coca-Cola) and research (because the benefits can not be quantified).
Current liabilities - obligations that will be satisfied within one year.
Examples include accounts payable and accrued liabilities.
An accrued liability is one you know you will owe in the near future, but no formal claim has been made at this time. An example is accrued wages (for wages already earned by employees, but not yet due to be paid).
Long-term liabilities - obligations that will be satisfied more than one year from now.
Examples include long-term debt and pension obligations.
Total liabilities = current liabilities + long-term liabilities
Owners' equity includes
Common stock - shares distributed by the company in return for money (capital) contributed to the company by a shareholder. (Note that buying and selling shares in the stock market does not affect the money that has been contributed directly to the company.)
Retained earnings - money earned by the company because of its business activities and not distributed to shareholders.
Money contributed to the company in return for obtaining company shares can be split into two parts - capital stock and additional paid in capital.
The capital stock account is based on the par value or stated value of the stock. (This is frequently a nominal value [such as $1 per share] and, in some cases, is a legal technicality without real economic meaning. It is the minimum amount that an outsider can pay the company for the stock.)
A contribution to the company in excess of this nominal amount is called additional paid in capital (or a similar name such as excess contributed capital).