ACCT 1201 Ronan Gal Or Chapter 1 Financial Statements and Business Decisions The Players Investors creditors largest lender owner managers employees Accountants know the most o Business Operations 1 Purchase parts and labor 2 Manufacture product 3 Sell products to customers 4 Collect cash from customers and pay creditors o Collect and process financial information o Reports information to decision makers internal managers and external investors and creditors Financial Accounting System periodic 4 times a year financial statements and related disclosures external Managerial Accounting System detailed continuous performance reports internal Organized transactions 4 Basic Financial Statements financial activities Balance Sheet snapshot of company o Listed 1 Name of the Company 2 Name of the Sheet 3 Date 4 In thousands of dollars o Assets listed by liquidity Liabilities listed due date o Accounting Equation Assets economic resources Liabilities financing from creditors Stockholder s Equity o Investment reinvested by owners Contributed Capital o Retained Earnings Profit o Typical Account Titles Assets Cash Accounts Receivable Notes Receivable Legal Document Inventory Supplies Investments Land PP E Property Plant and Equipment etc Liabilities Accounts Payable Accrued Expenses Unearned Revenue Stockholder s Equity Contributed Capital big umbrella Capital Stock Common Stockholders Retained Earnings What s left o Balance Sheet Accounts that Sound like Income Statement Accounts Prepaid Expense Insurance Rent Accrued Expense Accounts payable with invoice estimation Unearned Revenue Customer pays before company provides the good or service Income Statement Over 1 period What the investors look at Recent o Listed 1 Name of Company 2 Name of the Sheet 3 For the Year Quarter ending at Date 4 In thousands of dollars o Revenues Expenses Net Income o Typical Account Titles Revenue Revenues Sales Revenue Free Revenue Interest Revenue Rent Expense Cost of Goods Sold Wages Expense Rent expense Interest Expense Depreciation Expense Advertising Expense Insurance Expense Repair Expense Income Tax Expense Separate and LAST in Income Statement Statement of Retained Earnings How financial position is affected by net income and distribution of dividends o Links the Income Statement and the Balance Sheet o Either pay the company back or re invest in the company o Beginning Retained Earnings Net Income Dividends Ending Retained Earnings o Dividends do NOT affect the Income Statement ONLY the SoRE and therefore through Retained Earnings the Balance Sheet Statement of Cash Flows Inflows and Outflows regarding Operating Investing and Financing o Sum is the change in cash o Operating Directly related to earning income CURRENT assets and CURRENT liabilities with the exception of short term investments o Investing Related to acquisition or sale of productive assets LONG TERM assets and short term investments o Financing Directly related to finances of the enterprise investors and creditors LONG TERM Liabilities and SE o Ex Customer buys car on credit Asset decreases Accounts Receivable increases Month later customer pays for car Cash increases Accounts Receivable decreases AFFECTS BOTH B S and I S Relationship Among Statements o Net Income from I S Increase in Ending RE o Ending RE component of SE o Beginning of the year balance and change in cash end of the year balance o Must always read footnotes to financial statements Description of Accounting Rules Additional Detail Ex Depreciation Schedule Additional Financial Disclosures not listed Generally Accepted Accounting Principles GAAP Pacioli 1494 Italian 1933 Securities Act 1934 Securities and Exchange Act Securities and Exchange Commission SEC Government determines financial statements that public companies must provide to stockholders ENFORCES GAAP Oversight and Regulatory Bodies Financial Accounting Standards Board FASB Private sector responsibility to work out detailed rules of GAPP FORMULATES GAAP Must be current Major Economic Consequences o Effects of selling price of stock o Effects of bonuses o Loss of competitive information Changes in GAAP are Actively Debated Securities and Exchange Commission SEC ENFORCES GAAP Financial Accounting Standards Board FASB WRITES GAAP International Accounting Standards Board IASB WRITES INT L GAAP Public Company Accounting Oversight Board PCAOB OVERSEES AUDITORS American Institute of Certified Public Accountants AICPA WRITES CPA EXAM Government Accountability Office GAO AUDITS CONGRESS Accurate Records 1 Maintained system of controls over records and assets 2 External independent auditors verification 3 Board of directors oversees the integrity Report of management management certification Certified Public Accountant CPA o Only licensed can audit o Audits Examination of financial reports o Independent Auditors Express an opinion on the fairness of financial statements Before 2002 Accountants were self audited Now there is the Public Company Accounting Oversight Board PCAOB Issues detailed auditing standards Integrity Chapter 2 Investing and Financing Decisions and Balance Sheet Objective of Financial Reporting Primary objective To provide useful economic information about a business to help external parties primarily investors and creditors to make sound financial decisions Decision makers users of accounting information o Average investors creditors and experts Projecting a business future cash inflows and outflows o Creditors assess ability to 1 pay interest on long term loans and 2 pay back o Investors assess ability to 1 pay dividends and 2 be successful so stock principal on loan prices rise Accounting Assumptions Balance Sheet 1 Separate entity assumption Each business activities must be accounted for separately from the activities of its owners 2 Unit of measure assumption Each business entity accounts for and reports its financial results in terms of the national monetary unit only 1 3 Continuity assumption Businesses are assumed to continue to operate into the foreseeable future 4 Historical cost principle Assets recorded at the value on the date of the transaction 5 Time period assumption Must be able to divide it into artificial time periods 6 Full disclosure principle Requires that all circumstances and events that would make a difference to users of financial statements be presented Assets Probable future benefits owned or controlled o In order of liquidity o Current assets Within 1 year Liabilities Probable
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