Introduction to Accounting and Financial Reporting

ACCTG 215: Introduction to Accounting and Financial Reporting

Winter 2026, Chapter 1


    • .

Instructor Introduction

  • Instructor: Steph Grant (she/her)

  • Educational Background:

    • Undergraduate degree in Accounting from the University of Northern Iowa.

  • Current Position: PhD student at the University of Illinois at Urbana-Champaign specializing in accounting research.

  • Personal Interests: Enthusiastic fan of RuPaul's Drag Race.

Class Plan Overview

  • Key Learning Objectives:

    • Understanding the definition of accounting and its vital role as the "language of business."

    • Contrasting business structures: Sole Proprietorships vs. Corporations (including liability and funding differences).

    • Exploring the structure and interrelationship of the four primary financial statements.

Importance of Studying Accounting

  • The Language of Business:

    • Warren Buffett Quote: "You have to understand accounting and you have to understand the nuances of accounting. It's the language of business…"

    • Competency in accounting allows professionals to interpret financial health, evaluate investment opportunities, and manage resources effectively.

Definition of Accounting

  • Functional Definition: Accounting is the systemic process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information.

  • A Note on Judgment:

    • George May (1936): Highlighted that accounting is not just a collection of hard facts but involves professional judgment, conventions, and assumptions. It is a mix of reporting what happened and estimating future outcomes.

Types of Accounting and Their Users

  • Financial Accounting:

    • Primary Users: External stakeholders (Investors, Creditors/Banks, Regulators).

    • Goal: Provide standardized reports (GAAP) to help external parties assess profitability and risk.

  • Managerial Accounting:

    • Primary Users: Internal stakeholders (Managers, Executives, Department Heads).

    • Goal: Provide detailed, often proprietary, information for internal planning, budgeting, and performance evaluation.

  • Tax Accounting:

    • Focus: Compliance with Internal Revenue Service (IRS) regulations and minimizing tax liability through legal strategies.

  • The Rise of ESG (Environmental, Social, Governance):

    • Modern accounting increasingly tracks non-financial metrics to satisfy investor demand for sustainability and ethical practices.

    • Examples include carbon footprint tracking, gender pay gap analysis, and board diversity metrics.

Characteristics of Good Accounting

  • Decision Usefulness: The primary objective of financial reporting. Information must be:

    • Relevant: Capable of making a difference in a decision.

    • Faithful Representation: Accurately depicting the economic substance of what it purports to represent.

Business Structures: Sole Proprietorships and Corporations

  1. Sole Proprietorships:

    • Ownership: Owned by one person.

    • Liability: Unlimited personal liability; the owner is personally responsible for all business debts.

    • Taxes: Income is reported on the owner's personal tax return.

  2. Corporations:

    • Ownership: Owned by shareholders who hold shares of stock.

    • Legal Status: A separate legal entity distinct from its owners.

    • Limited Liability: Shareholders are generally only liable for the amount they invested; their personal assets are protected.

    • Capital: Easier to raise large amounts of money by selling stock to the public.

Communicating Financial Information: The Four Financial Statements

  • Transparency Requirement: Because shareholders (owners) are often separate from management, they rely on financial statements to monitor the company’s progress and stewardship of resources.

The Four Financial Statements:

  1. Balance Sheet (Statement of Financial Position):

    • Reports the financial position at a specific point in time.

    • Equation: Assets=Liabilities+Stockholders’ Equity\text{Assets} = \text{Liabilities} + \text{Stockholders' Equity}

  2. Income Statement (Statement of Operations):

    • Reports the summary of economic performance over a period of time.

    • Equation: Net Income=Revenues−Expenses\text{Net Income} = \text{Revenues} - \text{Expenses}

  3. Statement of Stockholders’ Equity:

    • Shows changes in the owners' claims on the company over a period, including new investments and dividends paid.

  4. Statement of Cash Flows:

    • Tracks the actual inflows and outflows of cash from Operating, Investing, and Financing activities.

Periodic Reporting and Fiscal Years

  • Time Period Assumption: To provide timely information, companies divide their life into artificial time periods.

  • Fiscal Year: A 12-month period used for accounting purposes. It does not always match the calendar year (Jan 1 – Dec 31). For example, a retailer might end their fiscal year in February to capture the full holiday return season.

Case Study: Lowe’s Companies, Inc.

  • The 10-K Report: A comprehensive annual filing required by the SEC. It includes:

    • Letter from CEO: Provides strategic context and high-level performance summaries.

    • Financial Statements: The core quantitative data.

    • Footnotes: Critical disclosures that explain the accounting methods used and provide more detail on specific line items.

Detailed Financial Statement Components
Assets

  • Economic resources that provide future benefits.

  • Current Assets: Expected to be converted to cash or used within one year (Cash, Inventory, Accounts Receivable).

  • Non-Current Assets: Long-term investments or physical property used in operations (PPE – Property, Plant, & Equipment).

Liabilities

  • Debts or obligations resulting from past transactions.

  • Accounts Payable: Money owed to suppliers for goods bought on credit.

  • Notes Payable: Formal written promises to pay a specific sum of money, often including interest.

Stockholders' Equity

  • Common Stock: The amount investors paid to the company in exchange for shares.

  • Retained Earnings: The cumulative amount of net income the company has decided to keep (reinvest) rather than pay out as dividends.

Accounting Rules and Standards

  • GAAP (Generally Accepted Accounting Principles): The standard framework of guidelines for financial accounting used in the U.S.

  • FASB (Financial Accounting Standards Board): The private, non-profit body given the primary responsibility for setting GAAP.

  • SEC (Securities and Exchange Commission): The government agency with the legal authority to prescribe accounting principles; they generally delegate this to FASB but oversee enforcement for public companies.

  • IFRS (International Financial Reporting Standards): Issued by the International Accounting Standards Board (IASB) and used in over 120 countries, aiming for global consistency.

Chapter 1 Checkout Questions and Practice

  • Assets vs. Liabilities: Remember that Accounts Receivable is an asset (money coming in), while Accounts Payable is a liability (money going out).

  • Retained Earnings Logic: Ending R/E=Beginning R/E+Net Income−Dividends\text{Ending R/E} = \text{Beginning R/E} + \text{Net Income} - \text{Dividends}

  • Inventory vs. Supplies: Inventory is held specifically for sale to customers; supplies are consumed in the day-to-day operations of the business.