ACCTNG 2400 1st Edition Lecture 5Outline of Last Lecture II. 4 Basic Financial Statementsa. Balance Sheetb. Statement of Retained Earningsc. Income statementd. Statement of Cash FlowsIII. Order of statement prepIV. Unit of measure assumption and headingOutline of Current Lecture I. Chapter 5: Financial Reporting Rulesa. Differences globallyII. Independent External Auditing III. Chapter 2: a. The accounting methodb. Analyzing transactionsc. Buying “on account” or “on credit”Current LectureI. Chapter 5: Financial Reporting Rulesa. Differences globallyUS: - SEC (securities and exchange commission) – requires companies to file certain reports to ensure sufficient, relevant information is available to customers.- FASB (Financial Accounting Standards Board) –Sets accounting standards for public US companiesThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- GAAP (Generally Accepted Accounting Principles) o More strict and rule basedo Focuses on income statement (money made)International:- IASB (International Accounting Standards Board) – counterpart to FASB in US.- IFRS (International Financial Reporting Standards) – counterpart to GAAP in US.o More principles basedo Focuses on balance sheet (health report)GAAP and IFRS are gradually trying to converge and be more similar. GAAP (US) is slowly adding and updating rules that match more closely to the IFRS (what the rest of the world bases their financial statements off of).SEC filings (required of public companies to file these reports):- 10-K Annual financial information- 10-Q Quarterly financial information- 8-K significant business events/changesII. Independent External Auditing- Companies are required to hire an expert external auditor (Certified public accountant) to check their financial statements for accuracy, and to confirm that the company is not trying to cheat in any way on their statements. - Auditors provide “reasonable assurance” that management’s financial statements ”fairly represent” the company’s financial position and performance without “material misstatement”Unqualified vs. Qualified audit opinion- Unqualified – financial statements are presented in accordance to GAAP (THIS IS A GOOD THING. COMPANIES WANT UNQUALIFIED STATEMENTS)- Qualified – financial statements fail to follow GAAP or not be able to complete needed tests. They can be corrected by the company and checked again. (THIS IS NOT WHAT COMPANIES HOPE TO GET FROM THEIR AUDITORS)“Qualification” = concern with statement = badChapter 2The accounting method1. Analyze activities and events – determine effects on company’s basic accounting equation2. Record in the company’s financial records – double-entry bookkeeping3. Summarize for reportingTransaction – an event or activity that has a direct and measurable financial effect on the assets, liabilities, or stockholders’’ equity of a business- In a transaction the company ALWAYS gives or receives something (has at least 2 effects on basic accounting equation- If it effects the basic accounting equation, it IS a transaction- An exchange of only promises is NOT a transaction- If one side is a promise and the other side either gave or received something, then it IS atransactionBuying “on account” or “on credit”Companies buy and sell from each other with informal agreements to pay soon, and both companies record the transaction in an “account” for each supplier and/or customer.Accounts payable = business has obligations to payAccounts receivable = business has the right to collect