1. Introduction to Financial Accounting

Introduction to Financial Accounting

Lecturer

  • S. Levkoff, PhD, CAP®

  • UC San Diego

  • Department of Economics & Rady School of Management

Overview of Accounting

  • Critical for recording business transactions and summarizing financial position and performance.

  • Functions as an information system describing firms through financial reports.

The Circular-Flow Diagram

  • Represents circulation of dollars among households and firms.

    • Households: Own factors of production, sell/rent to firms for income.

    • Firms: Hire factors to produce goods/services for consumers.

Types of Accounting

  1. Financial Accounting

    • Standardized reports for external stakeholders.

  2. Tax Accounting

    • Focuses on IRS compliance.

  3. Managerial Accounting

    • Tailored for internal reporting needs.

Financial Reporting Requirements

  • Governed by the SEC, includes:

    • 10-K: Annual Report

    • 10-Q: Quarterly Report

    • 8-K: Current Report

Key Challenges

  • Meeting reporting deadlines.

  • Timing recognition of sales/cash collections.

  • Accurate recording of long-term asset expenses.

Accounting Framework

  • Based on Generally Accepted Accounting Principles (GAAP).

  • International Financial Reporting Standards (IFRS) applicable in over 100 countries, with significant overlap with GAAP.

Management & Oversight

  • Management prepares financial statements; oversight from Board of Directors.

  • Independent auditors provide compliance opinions on GAAP.

  • External enforcement by SEC and regulatory bodies, aided by information intermediaries.

Required Financial Statements

  1. Balance Sheet

  2. Income Statement

  3. Statement of Cash Flows

  4. Statement of Stockholder’s Equity

  • Each serves distinct purposes summarizing a company's financial health.

Case Study Example

  • Bill’s Internet Security Services:

    • Net cash inflow of $8,000 from common stock issuance and loans.

    • Accounting income for December shows revenue recognition despite uncollected cash.

Future Focus

  • Preparing and interpreting financial statements, ratio analysis, asset pricing and valuation tools, starting with the balance sheet identity.