FinAcc Lecture 1

Definition of Accounting according to Carnegie

Technical, social and moral practice concerned with the sustainable utilization of resources and proper accountability to stakeholders

Accounting of social and institutional practice

Accounting as language of business, a measurement tool, accountability and control mechanism, legitimizing tool, political instrument

Purpose of financial accounting

accumulate and report economic information about financial performance, position and cashflows

Performance, position and cashflow: which elements belong to these?

Performance: Income statement (profit and loss)

Position: Balance Sheet

CashFlow: CF statement

External users of financial information

Financial stakeholders, shareholders, employees, suppliers, customers, regulators, others

Accounting information and economic decisions: equity, management, benefits, security and lending

When to buy, hold or sell an equity share

assess the stewardship and accountability of management

ability of entreprise to pay benefits to the employees

asses the security for amounts lent to a company

Accounting information and economic decision: dividends, tax, statistics, regulation

Determine distributable profits and dividends

Determine taxation policies

Use national income statistics

Regulate the activities of enterprises

Types of accounting: Management accounting and control

Management Accounting: measuring and reporting of accounting information to the management

Management control: influence of high-level managers on low-level managers to implement strategies

Types of accounting: Forensic accounting and auditing

Forensic accounting: the use of accounting skills to investigate fraud and to analyse financial information for use in legal proceedings.

Auditing: independent examination of an organization's financial records, processes, or systems to verify their accuracy, compliance, and completeness

What does the economic entity assumption require?

activites of an entity are to be kept separate and distinct from activities of the economic owner and all other entities

Rights and obligations of legal entity

Enter into contract, sue and be sued

Sole proprietorships vs corporations

Sole proprietorship is not a legal entity

Owner and business is seen as one

Owners have unlimited liability

3 types of business activities

Financing activites: raising money to start business

Investing activities: buying assets

Operating activities: Generating revenues

Operating Cycle

Period of time between the purchase of inventory and the collection of any
receivable from the sale of inventory

Important accounting principles; conmatconser

Consistency principle: company should use the same principles from year to year

Materiality principle: an item is a material when its size is more likely to influence the decision of an investor

Conservatism principle: using the least optimistic estimate

Historical Costs measurement principle

Assets are recorded at the cost price

Current Value Valuation: FV, ViU, CC

Fair Value: price received to sell an asset or settle a liability

Value in Use: NPV of future CF

Current Cost: replacement cost of an item

What does the conceptual framework deal with

Objective of financial reporting

qualitative characteristics of useful information

recognition of measurements of elements of financial statements

Other important assumptions; Gc, Unit, time

Going concern: assume that entity will continue indefinitely

Monetary unit: Yardstick used to measure amounts

Time period: artificial segmentation on the calendar used as basis

Equity basic formula

capital + retained earnings

Retained earnings: Revenue - Expenses - Dividends

Time criterions in financial statements

Balance sheet: a specific point of time

Income statement: Over a period of time

Statement of retained earnings: Over the life of a business

Liquidity definition

able to pay debts as they come due

What do revenues and expenses have in common?

They reflect the change in assets resulting from the sale of goods and services