VEE Accounting

Coaching Actuaries Accounting VEE

What is the main purpose of financial reporting?

identify, measure, and communicate financial information regarding economic entities to interested parties (equity investors and creditors)

What are the three financial statements?

balance sheet, income statement, state of cash flows

What are the three main activities companies participate in?

• financing activities

• investing activities

• operating activities

What do the accounting standards boards do?

establish and improve the standards of financial accounting, provide guidance and education of the standard to the public

What are some desirable attributes for the accounting standards boards to have?

• responsibilities within the board should be clearly defined

• high standards of ethics and confidentiality

• adequate authority and resources should be available

• objective should be clear

• independent from external sources and not influenced by others

What does FASB stand for?

Financial Accounting Standards Board

What are the two types of pronouncements the FASB issues?

• Accounting Standards Updates

• Financial Accounting Concepts

What do the Accounting Standard Updates entail?

amend the Codification and includes all relevant information regarding the update

What do the Financial Accounting Concepts do?

lay the foundation for the fundamental objectives and concepts FASB uses in development of the Codification

What is the difference between the Accounting Standards Updates and the Financial Accounting Concepts?

Only the Accounting Standards Updates establish GAAP

What does GAAP stand for?

Generally Accepted Accounting Principles

What is IASB?

International Accounting Standards Boards

What are the governing standards issued by the IASB?

International Financial Reporting Standards (IFRS)

What’s the difference between GAAP and IFRS?

GAAP = rules-based standards

IFRS = principle-based standards

Why don’t GAAP and IFRS converge?

too many differences in beliefs over key accounting topics

What does SEC stand for?

Securities and Exchange Commission

Why was the SEC created?

the US wanted to avoid future recessions by creating the SEC as the authority figure in reporting standards

What are some significant legislative acts regarding the inception of the SEC and government oversight of financial reporting?

• Securities Act of 1933

• Securities Exchange Act of 1934

• Sarbanes-Oxley Act of 2002 (SOX)

What is the Securities Act of 1933?

specifies what information investors must receive, prohibits misrepresentation, and requires initial registration of public securities

What is the Securities Exchange Act of 1934?

created the SEC and gave it authority to require periodic reporting of public companies

What is the Sarbanes-Oxley Act of 2002 (SOX)?

created the Public Company Accounting Oversight Board, which addresses auditor independence and strengthens corporate responsibility for financial reports.

What are the most notable reports issued by companies, required by the SEC, include?

• Form 10-K

• Annual Report

• Proxy Statement

• Form 10-Q

• Form 8-K

What is Form 10-K?

filed annually and contains information about company’s business, financial disclosures, and legal proceedings

What is the Annual Report?

not required by the SEC but most provide for shareholders — includes info from the 10-K but with additional information

What is the Proxy Statement?

sent to shareholders prior to shareholder meeting — a proxy gives another party the right to cast a vote

What is the Form 10-Q?

quarterly report filed by company — an abridged 10-K for operations in a single quarter

What is Form 8-K?

filed for major events, such as acquisitions and matters related to accounting and financial statements

What are the three different levels of the FASB conceptual framework, from top (3rd) to bottom (1st)?

• Recognition, Measurement, & Disclosure

• Qualitive Characteristics & Elements

• Objective

What are the three accounting and associated notes of financial reporting?

• Relevance

• Faithful Representation

• Comparability

• Understandability

The information provided must be useful in making investment, credit, and similar resource allocation decisions.

Relevance

This information must be complete, unbiased, and free of error.

Faithful Representation

This information must be easily comparable to other companies, as well as to previous reporting periods.

Comparability

An individual with reasonable business knowledge must be able to comprehend the information.

Understandability

What are the four assumptions that underlie the structure of financial accounting?

• Economic Entity Assumption

• Going Concern Assumption

• Monetary Unit Assumption

• Periodicity Assumption

The activities of a company are separate from its owners and other companies.

Economic Entity Assumption

The company will continue operating indefinitely into the future.

Going Concern Assumption

Reporting metrics are in a currency which represents the common denominator of economic activity.

Monetary Unit Assumption

The activities of the company can be easily divided into even time periods.

Periodicity Assumption

What are the four assumptions basic principles of financial reporting i s based off of?

• Measurement

• Revenue Recognition

• Expense Recognition

• Full Disclosure Principle

Companies consistently measure assets and liabilities based on historical cost or fair value, depending on the nature of the asset or liability.

Measurement

Companies recognize revenues in the period in which the performance obligation is satisfied, regardless of the timing of the payment.

Revenue Recognition

Expenses must be recognized with the associated revenues they support. For example, the labor cost associated with assembling a product must be recognized when the product is sold, not when the wages are paid. This approach is commonly known as the matching principle, as the timing of the expenses matches the timing of the revenues.

Expense Recognition

The company must disclose all relevant information which may influence the decision of resource allocation to a firm by potential investors or creditors.

Full Disclosure Principle

What does sustainability reporting indicate?

strong corporate governance

Resources controlled by the company used to generate future economic benefits

Assets

Obligations of the company from past events

Liabilities

Owner’s residual interest in the company

Equity

What is the basic accounting equation?

Assets = Liabilities + Equity

What makes an asset be classified as current?

if they are expected to be sold or used up within a year or one operating cycle, whichever is longer.

What makes a liability be classified as current?

if they are expected to be settled within one year or one operating cycle, whichever is longer, and extinguished using current assets.

What do non-current liabilities include?

Long-term financing

What is the operating cycle (cash conversion) cycle?

the time required for an initial outlay of cash to produce goods, sell goods, and receive cash in exchange for those goods.

How are current assets ordered on the balance sheet?

at the top is the most liquid and the bottom is the least

What are some of examples of current assets?

• Cash and Cash Equivalents

• Marketable Securities

• Accounts Receivables

• Inventories

• Other Currents Assets

Highly liquid financial assets with minimal risk. Some examples of cash equivalents include US Treasury bills and commercial paper

Cash and Cash Equivalents

Equity and debt securities traded in public markets

Marketable Securities

Customers owe these amounts from products and services already delivered. The level of accounts receivable is important, as managing the credit of customers is a source of cash for the company.

Accounts Receivables

Inventories are physical products that will be eventually sold to customers. Depending on the jurisdiction, inventory can be valued using a variety of methods. A company generally chooses the inventory costing method which minimizes the tax liability.

Inventories

Other current assets include items such as prepaid expenses and deferred tax assets.

Other Current Assets

What does PP&E stand for?

Property, Plant, and Equipment

What is PP&E?

tangible assets used in operations that last more than one period

How is are PP&E presented on the balance sheet?

in order of most permanent to least permanent

What is amortized cost (book value)?

the historical cost less accumulated depreciation and impairment losses

What is the market value?

the amount of money the asset could actually be sold for in the open market. Land is carried at cost and cannot be depreciated

What are intangible assets?

identifiable non-monetary assets without physical substance

What are some examples of intangible assets?

patents, licenses, and trademarks

What is an impairment test?

tests whether the economic value of the asset has fallen dramatically

What is goodwill?

the most notable intangible asset with an indefinite useful live. When a company acquires another company, the excess of the purchase price over the fair value of net assets is placed in goodwill.

What are long-term financial liabilities, such as loans and bonds, usually reported as?

amortized cost

What is the amortized cost of a bond?

the PV of all future payments, discounted at the yield to maturity at issuance

What are the six components of equity?

• common stock

• preferred shares

• treasury shares

• retained earnings

• accumulated other comprehensive income

• noncontrolling interest

Issuance of common shares represents ownership. Shares may or may not have a par value. The number of shares authorized, issued, and outstanding must be disclosed. The number of shares outstanding is the number of issued shares less treasury shares.

Common Stock

Preferred shareholders generally have higher seniority over common shareholders and are given a preferential dividend over common shareholders. However, preferred shareholders typically do not have voting rights.

Preferred Shares

These are shares repurchased by the company. A company could repurchase shares if management thinks the shares are undervalued, or to offset dilution from stock options. Treasury shares are non-voting and do not receive any dividends. Treasury stock acts as a negative balance for equity on the balance sheet.

Treasury Shares

Retained earnings are the cumulative amount of earnings not paid to owners in the form of dividends. This is the profit retained within the firm.

Retained Earnings

This account recognizes unrealized gains or losses, such as unrealized gains/losses on held investments or foreign currency translation gains/losses.

Accumulated Other Comprehensive Income

This is the equity interest in subsidiary companies that is held by third parties.

Noncontrolling Interest

What does a typical header on a balance sheet look like?

Company name at top, statement type, and then date.

What does the income statement show?

a company’s financial results over a period of time

The amount charged for goods and services. Net revenue is adjusted for items like discounts and estimated returns.

Revenue

Represent cash outflows, the depletion of assets, and any increases in liabilities. The grouping of expenses varies by company and industry.

Expenses

(also called net earnings, profit or loss) is referred to as the "bottom line" because it is the last line of the income statement. The entire purpose of the income statement is to show the calculation of net income for the company. One of the most important goals for all companies is to continually produce a positive and growing net income

Net income

Cash advances are treated as…

unearned revenue

Provides information about cash receipts and cash payments

Cash flow statement

What does the cash flow statement allow investors and creditors to evaluate?

• The ability to generate future cash flows.

• The ability to pay dividends and future obligations, such as debt.

• The reasoning for differences of net income and net cash flow from operating activities.

• The cash and non-cash investing and financing transactions for the period.

What are the three categories cash transactions are divided into?

• operating activities

• investing activities

• financing activities

Represent the day-to-day activities of a company. This includes activities such as sales, inventory purchases, and paying employees. It also includes cash flows from trading securities.

Operating Activities

Investing activities include purchasing and selling long-term assets, such as property, equipment, and intangible assets, which will generate future revenues for the company. It also includes long-term and short-term investments in equities and bonds (excluding cash equivalents and securities for dealing or trading).

Investing Activities

Financing activities include obtaining and repaying capital from shareholders and creditors.

Financing Activities

How do companies create a cash flow statement?

1. Calculate the change in cash.

2. Calculate the net cash flow from operating activities.

3. Calculate the net cash flows from investing and financing activities.