MGMT8803 Financial Accounting

Accounting

The language of business

Purpose of financial accounting

To provide meaningful quantitative financial information regarding an entity’s activities to decision makers

Financial accounting is not

Tax filing, managerial accounting

Decision makers

Shareholders, debt holders, managers, investment analysts, customers, strategic partners

What makes information useful?

Relevance and faithful representation

Relevance

Capable of making a difference to a decision maker

Faithful representation

Dependable and reliable

Where do financial accounting standards come from?

Congress to SEC to financial accounting standards board to Generally Accepted Accounting Principles (GAAP)

Financial accounting oversight

SEC, external audits, securities law

Securities Law

Allows you to sue over incorrect reporting

Required financial statements

Balance sheet, income statement, statement of shareholder’s equity, statement of cash flows, and statement of comprehensive income

Information beyond financial statements

Footnotes, independent auditor reports, management discussion and analysis, press releases

Balance sheet use

Describes the sources and uses of funds of a firm at a point in time

Assets

Economic resources that are owned or controlled by a company that have future economic benefit

Historical cost

Value of an asset last time there was a transaction

Market value

How much an asset is worth today

Liabilities

Future obligations to pay cash, transfer assets, or provide services to another party

Examples of liabilities

Wages payable, accounts payable, notes payable

Examples of assets

Cash, accounts recievables, inventory, land, buildings, equipment, copyrights, investments

Owner’s equity

Ownership interest in the net assets of an entity

Examples of owner’s equity

Capital stock, preferred stock, retained earnings

Assets = ?

Liabilities + owner’s equity

Use of funds = ?

Source of funds

Assets are listed on balance sheet in order of

Liquidity

Liquidity of assets

How soon an asset is expected to turn into cash

Liabilities are listed on the balance sheet in order of

Maturity

Maturity of liabilities

How soon a liability debt must be paid

Required header for financial statement

Company name, type of document, date of creation or period of interest

Ending retained earnings = ?

Beginning retained earnings + net income (minus loss) - dividends

Income statement use

Shows how much a company earned (not cash) over a period of time

Income statement benefits

Helps evaluate past performance, predict future performance, and assess risk

Revenue

Increase in a company’s resources from the sale of goods or services

Revenue examples

Sales revenue and rent revenue

How is revenue different than an asset?

Revenue is always a change while assets are static

Expenses

Costs incurred in the normal course of business to generate revenue

Expense examples

Cost of goods sold, utilities, wages, depreciation

Operating expenses

Usual and customary costs a company incurs to support its main business activities

Nonoperating expenses

Relate to the company’s financing and investing activities

Gains/losses

Money made or lost outside of normal firm operations

Gains/losses example

Gain on sale of operating equipment or loss on the sale of land

Net income or loss

Overall measure of the performance of a company

Most important accounting number

Net income

Earnings per share

Net income divided by the number of shares outstanding

Sales revenue type and financial statement

Revenue, income statement

Accounts recievable type and financial statement

Asset, balance sheet

Cash type and financial statement

Asset, balance sheet

Accounts payable type and financial statement

Liability, balance sheet

Cost of goods sold type and financial statement

Expense, income statement

Loss on sale of land type and financial statement

Loss, income statement

Capital stock type and financial statement

Shareholder’s equity, balance sheet

Rent revenue type and financial statement

Revenue, income statement

Inventory type and financial statement

Asset, balance sheet

Retained earnings type and financial statement

Shareholder’s equity, balance sheet

Bond payable type and financial statement

Liability, balance sheet

Rent expense type and financial statement

Expense, income statement

Statement of shareholder’s equity use

Reconcile the beginning and end balances of the shareholder’s equity accounts

Main equity categories

Capital stock, retained earnings, treasury stock, other comprehensive income

Statement of cash flows use

Describes an entity’s cash inflows and outflows during a period

Cash definition

Cash and cash equivalents - includes bank accounts, cash, coin, and short term liquid investments

Sections of cash flow statement

Operating activities, investing activities, financing activities

Operating activities

Cash transactions that enter into the determination of net income (same as income statement)

Investing activities

Cash transactions involved in the purchase and sale of PPE, other long term assets, and making/collecting loans or investments

Financing activities

Cash transactions whereby resources are obtained or repaid to owners and creditors

PPE

Property, plants, equipment

Balance sheet and income statement linkage

Retained earnings

Balance sheet and statement of cash flow linkage

Changes in cash

Operating section of the statement of cash flows

Cash-basis income statement