Lecture_Notes_2025 (1)

BMGT 220L: Introduction to Financial Accounting

Lecture Notes Overview

• Lecture Notes 1—Introduction and the Fundamentals of Accounting: Pages 1-22

• Lecture Notes 2—Statement of Cash Flows: Pages 23-32

• Lecture Notes 3—Revenue Recognition and Accounts Receivable: Pages 33-49

• Lecture Notes 4—Inventory & Working Capital Analysis: Pages 50-61

• Lecture Notes 5—Long-lived Assets: Tangible Assets (PP&E): Pages 61-70

• Lecture Notes 6—Long-lived Assets: Intangible Assets: Pages 71-80

• Lecture Notes 7—Marketable Securities: Pages 81-86

• Lecture Notes 8—Shareholders' Equity (SE): Pages 87-104

• Lecture Notes 9—Introduction to Financial Statement Analysis: Pages 104-108

Fundamental Concepts of Accounting

Introduction to Financial Reporting

• Financial Reporting Rules

  • Governed by Generally Accepted Accounting Principles (GAAP), which evolve over time.

  • Who Sets the Rules?

    • The Securities and Exchange Commission (SEC) has legal authority over accounting standards in the U.S.

    • Delegated to the Financial Accounting Standards Board (FASB).

    • Public companies must file annual and periodic reports (e.g., 10-K, 10-Q).

Sarbanes-Oxley Act (SOX)

• Enacted in 2002 after major corporate scandals (e.g., Enron, WorldCom) to improve transparency.

• Establishes the Public Company Accounting Oversight Board (PCAOB) to oversee auditors.

• Key provisions include:

  • Annual assessments of internal controls.

  • Enhanced financial disclosures.

  • Requirements for auditor independence and corporate governance.

Major Financial Reporting Products

1. Annual Report (10-K)

   • Sections may include:

     • Management’s Discussion and Analysis (MD&A)

     • Financial Statements

       • Balance Sheet, Income Statement, Statement of Cash Flows

     • Notes to Financial Statements

     • Independent Auditor Report

     • Certification by management

2. Quarterly Report (10-Q)

3. Other SEC Reports:

   • 8-K for material events, Registration Statement/Prospectus for new securities, Proxy Statement for shareholder voting.

Principal Financial Statements

Balance Sheet

• Describes financial position (Assets = Liabilities + Equity).

• Includes assets, liabilities, and shareholders' equity.

Income Statement

• Reports operating results (revenues and expenses) over a period.

• Connects to net income, gains and losses.

Statement of Cash Flows

• Tracks cash flows from operating, investing, and financing activities.

Statement of Stockholders' Equity

• Reports changes in equity accounts over time including contributed capital and retained earnings.

Measurement Bases in Accounting

• Cash Basis vs. Accrual Basis:

  • Cash Basis: Records revenues and expenses when cash changes hands.

  • Accrual Basis: Required by GAAP, recognizes revenues and expenses based on contractual obligations even if cash hasn't exchanged hands.

Walmart's 2024 Annual Report Insights

• Company Overview: Founded by Sam Walton in 1962 as a retail giant.

• Annual report serves as a comprehensive source of both financial and non- financial data.

• Significant financial metrics to consider:

  • Fiscal year-end, balance sheets, income statements, cash flow statements, Net Income and EPS.

Financial Data Highlights from 2024 Report

1. Cash and Equivalents:

   • $9,867 million as of Jan 31, 2024.

2. Net Income:

   • Consolidated net income of $16,270 million for fiscal 2024.

3. Revenue Recognition:

   • Recognizes sales revenue when merchandise or services are sold; gift card revenue is recognized upon redemption.

The Accounting Equation

• Basic Equation: Assets (A) = Liabilities (L) + Stockholders' Equity (SE).

• Assets: Current assets (cash, receivables, inventory) and non-current assets (PP&E, intangible assets).

• Liabilities: Current (due within a year) and non-current (long-term obligations).

The Accounting Cycle

1. Document Transactions: Journal entries using debit and credit conventions.

2. Post Transactions: To T-accounts reflecting impact on accounts.

3. Closing Entries: Transfer balances to retained earnings at the end of the period.

Adjusting Process in Accounting

Types of Adjustments

1. Deferrals: Adjust prepaid expenses and unearned revenue.

2. Accruals: Record unpaid expenses and revenues earned but not collected.

3. Estimates: Adjust for depreciation, doubtful accounts.

Example Adjusting Entries

• Adjusting for prepaid expenses, accrued revenues, and bad debt expense.