Chapter 1- My own notes

How everything is set:

SEC, FASB- Concenptual framework (process) - GAAP

Information being provided by accountant that are useful to make a decision:

Decision Usefulness

Three accounting groups that use decision usefull accounting information:

Owner/managers, Creditors, and stockholders.

Owners and managers look at four documents to make financial decisions:

Income statement, Statement of owner’s Equity, the Balance sheet, and the Statement of cashflows

What is the Income Statement?:

a document that shows how much we earned and how much we spent.

What is the Statement of Owner’s Equity?:

a document showing the difference between total assets and total liabilities, resulting in the overall value of owner's equity.

/

The amount of money invested by the owner in the business minus any money taken out by the owner of the business

/

A document showing what the owners own of the business.

What is the balance sheet?:

A document that shows what we own and what we owe.

What is the Statement of Cash Flows?:

A document that shows all the in and out ways of cash of the company.

What will Creditors do with the financial statements?

They will look at them and decide wether to give the money or not. They will look at the cash flow of the company.

What is the SEC?

It is a Federal agency that helps the FASB make GAAP. They help a little and mainly approve or disaproove of rules that might hurt the government.

They also administer the Act called “The Securities Exchange Act of 1934”, make companies that issue bonds to give extra financial statements, and make companies with power around the economic sector act quicker on specific matters.

Who is in charge of the private sector?

The SEC and the FASB

Who is in charge of the Public Sector?

The FASB and the GASB ( Governmental Accounting Standards Board).

What is the FASB?

A company that establishes accounting rules. They are oversighted by the SEC and the FAF (Financial Accounting Foundation). The FASAC (Financial Accounting Standards Advisory Council) is the one that gives the expertise and knowledge to the FASB.

This is the flow on how each group is in charge of making GAAP:

FAF (Financial Accounting Foundation): Selects the members of the FASB and exercises oversight.

FASB (Financial Accounting Standards Board): Sets the standards

FASAC (Financial Accounting Standards Advisory Council): Consults on major policy issues, technical issues, project priorities, and selection and organization of task forces.

When making standards, the FASB has to follow 2 rules:

1. Considerate the general public’s opinion, not just the accountants.

2. Follow a process called “Due Process” that gives interested people enough opportunity to present their views.

Due Process System:

1. Topics are seen and put in the table of the board.

2. Preliminary views: The board does a research on the topics or issues presented and weight them with pros and cons.

3. Make a public hearing with their opinions.

4. After hearing the opinions of the standards created, make a template with all of them.

5. Accounting standards update: Publish the final template.

4 out of 7 membes have to agree with the template.

The statements the FASB gives:

1. The Accounting Standards Update (also known as the Financial Accounting Standards).

2. Financail Accounting concepts.

What is the Accounting Standards Updates?:

These are just the changes added into the Codification that are added through out the years.

Each update consists of the following:

1. An explanation for the change.

2. Information to make the reader understand the change.

3. A date for when the changes will be effective.

What is the Financial Accounting Concepts?:

These would be the reasons of why we do what we do, concepts or ideals basically, that were put into a document which then is used as a guide when rules are made.

What is the AICPA (American Institute of Certified Public Accountants)?:

It is the national organization of practicing certified public accountants.

What is the organization that sets the Standards in over 140 countries?:

That would be the IASB (International Accounting Standards Board), and the standards are called IFRS (International Financial Reporting Standards).

What is the FASB Codification?:

The book of rules of accounting. The Codification has all GAAP and it is the one that has the only authoritive, everything else is Non-authoritive.

If the Codification doesn’t cover something, the Financial Accounting Concepts will be used, or the advice of the IFRS will be used.

What is the Conceptual Framework?:

This is the process of making rules. For some reason it has one.

The conceptual framework has 8 parts in it:

1. The objective

2. The Reporting entity

3. Qualitive Characteristics.

4. Elements

5. Recognition and Derecognition

6. Measurement

7. Presentation

8. Notes

1. The objective:

The reason of why we do it.

What is General Purpose Financial Report?:

A document with all the Financial Statements. It also has all the related notes and supplementary information.

What is General Purpose Financial Reporting?:

The action of giving the document.

2. The Reporting entity:

The companies.

3. Qualitive Characteristics:

Making sure that we report information that is important.

3. Qualitive Characteristics:

-There are 2 elements that help us pick what information to report:

1. Relevance

2. Faithful Representation

3. Qualitive Characteristics:

-Relevance:

Info that can make a difference. Information can be material (good enough to affect a decision) and Inmaterial (not good to make a difference).

3. Qualitive Characteristics:

-Relevance has 3 fundamental qualities:

1. Predictive

2. Confirmatory value

3. Materiality

3. Qualitive Characteristics:

-Relevance has 3 fundamental qualities:

1. Predictive Value:

Information that can help us make a guess about the future. This is very important due to investors and creditors.

3. Qualitive Characteristics:

-Relevance has 3 fundamental qualities:

2. Confirmatory value:

Information that can help us make a confirm or correct our expectation of a company.

3. Qualitive Characteristics:

-Relevance has 3 fundamental qualities:

3. Materiality:

Information that is good enough to affect a decision.

The people in charge of picking what information to report (accountants) shoudl also consider if:

1. If the information can convert a loss into a profit or the other way around.

2. Could increase management compensation.

3. If it could hide ilegal information.

4. Preserves a positive earnings trend (keeping our records look good to make investors keep inventing in our company).

Companies should consider both qualitive and quantitive factors in determining wether an item is material.

3. Qualitive Characteristics:

-Faithfull Representation has 3 fundamental qualities:

1. Completeness

2. Neutrality

3. Free from Error

3. Qualitive Characteristics:

-Faithfull Representation has 3 fundamental qualities:

1. Completeness:

All the information that is needed for faithful representation is provided.

3. Qualitive Characteristics:

-Faithfull Representation has 3 fundamental qualities:

2. Neutrality:

Information that was not hand-picked to make the company look good in some way.

3. Qualitive Characteristics:

-Faithfull Representation has 3 fundamental qualities:

3. Free from Error:

Information being as accurate as possible.

3. Qualitive Characteristics:

-Relevance and Faithfull Representation have 4 Enhancing qualities (qualities that strenghthen both of them):

1. Comparability

2. Verifiability

3. Timeleness

4. Understandability

3. Qualitive Characteristics:

-Relevance and Faithfull Representation have 4 Enhancing qualities (qualities that strenghthen both of them):

1. Comparability

Information that is given that looks like other companies so that investors don’t have a hard time understanding it.

3. Qualitive Characteristics:

-Relevance and Faithfull Representation have 4 Enhancing qualities (qualities that strenghthen both of them):

2. Verifiability:

Information given where strangers can come to the same conclusion.

3. Qualitive Characteristics:

-Relevance and Faithfull Representation have 4 Enhancing qualities (qualities that strenghthen both of them):

3. Timeliness:

Information given where it is given as soon as it is found or when reporters see it appropiate.

3. Qualitive Characteristics:

-Relevance and Faithfull Representation have 4 Enhancing qualities (qualities that strenghthen both of them):

4. Understandability:

Information given that is presented clearly and easily understandable. .

Concisely:

Information that is put in a way that is brief but comprehensive.

4. Elements:

These are the terms used in accounting that constitute the proffession:

1. Assets

2. Liabilities

3. Equity or Net Assets

4. Investments by owners

5. Distributions to owners

6. Comprehensive income

7. Revenues

8. Expenses

9. Gains

10. Losses

11. Profit

12. Net Income

4. Elements:

-Assets

Things the company owns or controls that will help it make money or provide value in the future.

4. Elements:

-Liabilities

Things the company owes - its responsabilities to pay money or provide goods or services in the future.

4. Elements:

-Equity or Net Assets

Money or an object the company is left with after the owners subtract everything they owe from everythig they have (their assets).

4. Elements:

-Investment by owners

when owners put their money toward their business.

4. Elements:

-Distribution to owners

Distributing money or assets to the owners for something they did.

4. Elements:

-Comprehensive income

How much a company’s value changed during a period of business and transactions except when owners put money in or take money out.

4. Elements:

-Revenues

Money a business brings in from selling its main products or services.

4. Elements:

-Expenses

What it costs to run the business.

4. Elements:

-Gains

Extra Money gotten, from non-operating activities (like selling equipment for more than it cost).

4. Elements:

-Lossess

Money lost from non-operating activities (like selling equipment for less than it cost).

4. Elements:

-profit

The actual money earned by the company after deducting expenses.

4. Elements:

-Net income

The final profit after all expenses, taxes, interest, and other costs are taken out.

The FASB classifies Elements in 2 groups:

1. Assets, liabilities, and Equity (or Net Assets) show what a company owns and owes at a specific point in time.

2. The other seven elements show what happens to the company over a period of time — the activities and events that change those amounts.

Changes of the second group affect the first one. This effect is called “articulation”, meaning that the amounts in one financial statement connect to the balances of another.

5. Recognition and DeRecognition:

For an item to be included in the financial statements (recognized/recorded) or removed from it (DeRecognized), and item must:

1. Be an element

2. Has to have a value that can be measured and that matters to users of the financial statement.

3. Must be faithfully represented.

An item is DeRecognized when it no longer meets one of the above.

6. Measurement:

Accountant figuring out the right numbers to put in the financial statements.There are 2 rules that have to be followed in here:

1. Assets should not be shown for more than they can realistically be sold for or used to earn.
   Example: Boeing had to lower the value of some assets by $3.5 billion because its planes were grounded after fatal crashes.

2. Liabilities should not be shown for less than what the company will actually have to pay.
   Example: The SEC said General Electric reported its insurance debts too low by several billion dollars.

In short, assets should not be overstated, and liabilities should not be understated.

7. Presentation:

Template. How financial information is shown in the financial statements.

It deals with how items, totals, and subtotals are displayed using numbers and words so users can understand the company’s financial information.

8. Notes:

Notes explaining things at the end of the financial statements.

Which one are the Main financial statements?

The balance sheet, the income statement, and the cash flow statement.

The following assumptions and principles help to explain how companies should recognize, measure, and report financial elements and events. Together, these concepts provide guidance when dealing with difficult or unclear accounting issues.

Accounting is based on four main assumptions (a thing that is accepted as true or as certain to happen, without proof):

1. economic entity

2. going concern

3. monetary unit

4. periodicity

Accounting is based on four main assumptions (a thing that is accepted as true or as certain to happen, without proof):

1. Economic entity

The business finances must be separate from the personal finances of its owners.

Accounting is based on four main assumptions (a thing that is accepted as true or as certain to happen, without proof):

2. going concern

The company is expected to continue operating always.

Accounting is based on four main assumptions (a thing that is accepted as true or as certain to happen, without proof):

2. going concern

The going concern assumption has three significant therefores:

1. Historical cost only matters if the company continues operating. If liquidation was expected, that company would report its assets at what they could be sold for.

2. Depretiation and amortization would not be necessary in liquidation. If the company was shutting down, there would be no need to spread asset costs over time.

3. Classifying assets and liabilities as current or non-current would lose meaning. In liquidation, it would make more sense to report liabilities based on the order in which they would be paid.

What is historical cost?:

Recording an asset in the company’s book at the price it was paid for (plus the cost of getting the thing ready for use). Any price changes, or if the thing lost value, that amount will be put under impairment.

What is Net Realizable Value:

The estimated selling price of an asset in the ordinary course of business, minus any costs to complete and sell the asset

What is a Current asset?:

Cash and assets that are expected to turn to cash within one year.

What is a Non-Current asset?:

Assets that a company expects to use for more than one year to generate revenue. Long Term Asset

What is a Current liability?:

Liabilities due within one year.

What is a Non-Current liability?:

Liabilities due in more than one year. Long Term Liability

Accounting is based on four main assumptions (a thing that is accepted as true or as certain to happen, without proof):

3. Monetary unit

All economic activity is measured and reported using money. It provides an appropiate basis for accounting.

Accounting is based on four main assumptions (a thing that is accepted as true or as certain to happen, without proof):

4. Peridiocity

The basis in which companies publish their financial statements. Either yearly, quarterly, or monthly. Yearly or quarterly are the most preferable.

We generally use four basic principles of accounting to record and report transactions:

1. measurement

2. revenue recognition

3. expense recognition

4. full disclosure

We generally use four basic principles of accounting to record and report transactions:

1. Measurement

There are 2 methods to record things:

1. Historical Cost: Recording an asset in the company’s books with the price it paid for (plus the cost of getting the thing ready for use).

This method is the most verifiable.

2. Fair value: Recording an asset in the company’s books with the price that the market gives it if it were to be sold today.

What is Gross Sales?:

The total amount of your sales without factoring in deductions.

We generally use four basic principles of accounting to record and report transactions:

2. Revenue recognition

Writing down the revenue when the job is done. Money received before this is recorded as liability.

What is Accrual basis?:

Recording revenue when the job is actually done.

What is deferred revenue?:

Money received before the job is done is recorded as a liability.

We generally use four basic principles of accounting to record and report transactions:

3. Expense recognition

Writing down/ recording Expense when the work or product actually contribute to making revenue.

There are 2 expenses in a company:

1. Product costs

2. Period costs

What is a product cost?:

labor, overhead, and materials used to make a product. These costs are recorded as inventory first and then turned into an expense when the product is sold.

What is a period cost?:

Managers’ salaries and office expenses. These costs are expensed right away because they relate to the time period, not to a specific product.

We generally use four basic principles of accounting to record and report transactions:

4. Full disclousure

Share all the information that is important.

What is Equity?:

The remaining value of an owner's interest in a company after subtracting all liabilities from total assets

What is Owner’s Equity?:

The owner's rights to the assets of the business. It's what's left over for the owner after you've subtracted all the liabilities from the assets.

Assets – Liabilities = Owner's Equity

Users find information about a company’s financial position (what the company currently owns, owes, and it has. Basically its assets, liabilities, and equity) in the income statement, statement of cash flows, and the investments of the company somewhere on these 3 places:

1. In the main financial Statements (Income Statement, Balance sheet, and Statement of Cash flows).

2. In the notes of those statements.

3. In the supplementary information section (more fucking info after the notes)

What is Cost Constraint?:

The cost of providing information must be justified by the benefits it offers users. If information costs more to gather and report than it’s worth to investors, creditors, and others, it shouldn’t be disclosed (shared/published).

These are the major challenges in Financial Reporting:

1. GAAP in a Political Environment

2. Expectations of GAP

3. Financial reporting issues

4. Ethical issues

These are the major challenges in Financial Reporting:

1. GAAP in a political environment

GAAP is made by the FASB, which hears everyone. The only way in which the FASB can be persuaded toward evil purposes, it’s by people joining them and trying to influence other members.

These are the major challenges in Financial Reporting:

2. Expectation of GAP

This is what the public thinks Accountant should do vs what accountants think they can do.

The Sarbanes-Oxley Act is a law that gives the SEC the power to combat fraud and poor reporting practices. The law also made a group called PCAOB (Public Accounting Oversight Board) which is a vigilante over accounting practices.

These are the major challenges in Financial Reporting:

3. Financial reporting issues

X

What are hard assets?:

Essential components of a business that have a useful life of more than a year and don't directly become part of the product itself. These assets include machines, computers, buildings, land, and even leasehold improvements where you can modify rented spaces.

What are soft assets?:

Intangible assets (copyrights, trademarks, and patents)

These are the major challenges in Financial Reporting:

4. Ethical Issues

Be rightous.