ACCT 301 - Chapter 1 Teacher's Notes

Accounting’s purpose

Identify, measure, and communicate financial information about economic entities to interest parties ie

Managerial Accounting

Internal use reports are generated (for management eyes only). Used by management to plan, control, and evaluate a company’s operations.

Financial Accounting

Financial reports on the entity for use by both internal (management) and external parties. External users include investors, creditors, unions, and government agencies. Financial statements and note disclosures are prepared and issued, along with supplemental disclosures and other reports that are made available to the public, creditors, tax authorities, investors, etc. These external reporting materials allow the external users to make informed decisions and evaluate company performance.

Accounting Information

Must be useful and relevant for decision-making. The information must faithfully represent the financial activities of the company, and it must be comparable, verifiable (reliable), timely and understandable. Allow investors to assess the entity’s ability to generate cash inflows and management’s ability to enhance capital providers’ investments.

Entity Perspective

Companies viewed as separate and distinct from their owners.

Income statement formula

Revenues – Expenses = Net Income or (Loss)

Income statement’s purpose

To report business operation information for a period of time.

Statement of Stockholders’ Equity purpose

To report how changes in equity affected the company’s financial position during a period of time. The Retained Earnings portion of this statement is embedded within the ___.

Balance sheet formula

Assets = Liabilities + Stockholders’ Equity

Balance sheet’s purpose

To report the financial position at a point in time.

Statement of cash flows formula

CF Op + CF Inv + CF Fin = Change in Cash + Beg Cash Balance = End Cash balance.

Statement of cash flows purpose

To summarize how the company generated and used its cash through operating, investing, and financing activities during a period of time.

Operating Activities

Directly related to earnings. Activities that affect revenues, expenses, changes in current assets, and changes in current liabilities. Income Statement, changes in non-cash CA and CL.

Investing Activities

The buying and selling of long-lived assets, buying and selling of investments, and lending to other parties. Involves changes in Non-Current Assets.

Financing Activities

Any long-term borrowing and repayments, and equity activities including issuing stock, paying dividends. Involves changes in LT liabilities and Stockholder’s Equity.

Note Disclosures

Integral part of each financial statement. They provide more detail and explanations to allow for deeper analysis and comparison.

Other Reports

Other reporting information that includes supplementary schedules in the annual report, news releases, management’s forecasts, social/environmental impact statements, governmental reporting (ie

Three organizations involved in accounting policy-setting bodies

Securities and Exchange Commission (SEC), American Institute of Certified Public Accountants (AICPA), and Financial Accounting Standards Board (FASB).

Securities and Exchange Commission (SEC)

Established by federal government and administers the Securities Exchange Act of 1934. Tasked with helping to develop and standardize financial information presented to stockholders. They have and continue to advocate for an oversight role. They encouraged the creation of private standard-setting bodies, which evolved into the AICPA and then the FASB. The SEC requires public companies to adhere to GAAP and the SEC has enforcement authority over companies listed on a stock exchange.

American Institute of Certified Public Accountants (AICPA)

National professional organization that established the following

Financial Accounting Standards Board (FASB)

Characteristics of the FASB, which differed from the APB, includes Smaller Membership, Full-time Remunerated Membership, Greater Autonomy, Increased Independence, and Broader Representation. FASB issues Accounting Standards Updates and Financial Accounting Concepts. FASB is the standard setting body for GAAP.

FASB Codification’s Goal

To provide in one place all the authoritative literature related to a particular topic.

Financial Accounting Standards Board Codification Research System (CRS)

An online, real-time database that provides easy access to the Codification. Provides a topically organized structure, subdivided into topic, subtopics, sections, and paragraphs, using a numerical index system.

FASB Codification authoritative and non-authoritative

Creates one level of GAAP, which is considered ___ and all other accounting literature is considered ____.

GAAP challenges

Product of political action. Difficult to close in light of accounting scandal which lead to Sarbanes-Oxley Act.

Financial reporting issues

Key nonfinancial measurements aren’t included in financial reports, forward-looking information is excluded, soft assets aren’t a focus, timeliness, understandability, and ethical dilemmas.

International Reporting

The two accepted standards for international reporting are US GAAP set by FASB or International Financial Reporting Standards (IFRS) which is issued by the International Accounting Standards Board (IASB).

Conceptual framework objective

To provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity.

Qualitative characteristics

Distinguish more useful information from less useful information for making decisions.

Relevance

Accounting information must be capable of making a difference in a decision. Information must provide predictive value, confirmatory value, and materiality.

Predictive value

Financial information has ___ if it has value as an input to predictive processes used by investors to form their own expectations about the future.

Confirmatory value

Relevant information also helps users confirm or correct prior expectations.

Materiality

Information is ___ if omitting it or misstating it could influence decisions that users make on the basis of the reported financial information.

Faithful representation

Means that the numbers and descriptions match what really existed or happened. To have ___, information must be complete, neutral, and free from error.

Complete

Means that all the information that is necessary for faithful representation is provided.

Neutral

Means that a company cannot select information to favor one set of interested parties over another.

Free from error

An information item that is ___ will be a more accurate (faithful) representation of a financial item.

Enhancing qualities

Distinguish more-useful information from less-useful information and include assets such as comparability, verifiability, timeliness, and understandability.

Comparability

Information that is measured and reported in a similar manner for different companies.

Verifiability

Occurs when independent measurers, using the same methods, obtain similar results.

Timeliness

Means having information available to decision-makers before it loses its capacity to influence decisions.

Understandability

The quality of information that lets reasonably informed users see its significance.

Assets

Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.

Liabilities

Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.

Equity

Residual interest in the assets of an entity that remains after deducting its liabilities.

Investments by Owners

Increases in net assets of a particular enterprise resulting from transfers to it from other entities of something of value to obtain or increase ownership interests (or equity) in it.

Distributions to Owners

Decreases in net assets of a particular enterprise resulting from transferring assets, rendering services, or incurring liabilities by the enterprise to owners.

Comprehensive Income

Change in equity (net assets) of an entity during a period from transactions and other events and circumstances from non-owner sources.

Revenues

Inflows or other enhancements of assets of an entity or settlement of its liabilities (or a combination of both) during period from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.

Expenses

Outflows or other using up of assets or incurrences of liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major or central operations.

Gains

Increases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from revenues or investments by owners.

Losses

Decreases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from expenses or distributions to owners.

Economic Entity assumption

Company keeps its activity separate from its owners and other businesses.

Going Concern assumption

Company to last long enough to fulfill objectives and commitments.

Monetary Unit assumption

money ($) is the common denominator.

Periodicity assumption

Company can divide its economic activities into time-periods

Measurement Principle

Commonly used measurements are based on historical cost and fair value.

Historical cost

Provides a reliable benchmark for measuring historical trends.

Fair value

Information may be more useful. The Board has given companies the option to use ___ as the basis for measurement of financial assets and financial liabilities. Reporting of ___ information is increasing.

Revenue Recognition

Requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied.

Expense Recognition

“Let the expense follow the revenues.”

Full Disclosure

Providing information that is of sufficient importance to influence the judgment and decisions of an informed user.

Full disclosure is provided through

Financial statements, notes to the financial statements, and supplementary information.

Cost effectiveness constraint

Cost of providing information must be weighted against the benefits that can be derived from using it.