Chapter 1 Financial 3rd Ed

Spiceland | Thomas | Herrmann

Financial Accounting

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

A Frameworkfor FinancialAccounting

Chapter 1

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Learning Objectives

• Describe the two primary functions of financial accounting

• Understand the business activities that financial accounting measures

• Determine how financial accounting information is communicated through financial statements

• Describe the role that financial accounting plays in the decision-making process

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Learning Objectives

• Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting

• Identify career opportunities in accounting• Explain the nature of the conceptual framework

used to develop generally accepted accounting principles


Part A

Accounting as a Measurement/

Communication Process

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Learning Objective 1

Describe the two primary functions of financial accounting

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Accounting

• A system of maintaining records of a company’s operations and communicating that information to decision makers

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Accounting Information

• Managerial accounting: information provided for internal users

• Financial accounting: information provided for external users

Internal users

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Primary Functions of Financial Accounting

• Measure business activities• Communicate measurements for decision making

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Illustration 1.2—Framework forFinancial Accounting



Understand the business activities that financial accounting measures

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Business Structure

• Sole proprietorship: business is owned by one person

• Partnership: business is owned by two or more persons

• Corporation: business is legally separate from its owners• Owner-manager separation typical• Limited liability of stockholders

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Business Activities

• Financing activities: transactions the company has with investors and creditors

• Investing activities: transactions involving the purchase and sale of resources that provide benefit for several years

• Operating activities: transactions that relate to the primary operations of the company

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Basic Accounting Equation

• Explains resources and their claims

Revenues – Expenses = Net income (loss)

• Dividends: distributions to owners

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Business Activities andTheir Measurement



Determine how financial accounting information is communicated through financial statements

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• Primary financial statements• Income statement• Statement of stockholders’ equity• Balance sheet• Statement of cash flows

Communicating Through Financial Statements

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Income Statement

• Reports the company’s revenues and expenses over an interval of time

• Shows whether revenues were enough to cover expenses

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Illustration 1.5—Income Statement

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Statement of Stockholders’ Equity

Stockholders’ Equity

= Common Stock + Retained Earnings

Summarizes the changes in stockholders’ equity over an interval of time

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Illustration 1.6—Statement of Stockholders’ Equity

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Balance Sheet

Assets = Liabilities + Stockholders’ Equity

Presents the financial position of the company on a particular date

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Illustration 1.7—Balance Sheet

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Statement of Cash Flows

Measures activities involving cash receipts and cash payments over an interval of time

Can be classified into three categories

Operatingcash flows

Investingcash flows

Financingcash flows

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Illustration 1.8—Statement of Cash Flows

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Illustration 1.9—Links among FinancialStatements



Describe the role that financial accounting plays in the decision-making process

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Illustration 1.10—Use of Financial Accounting Information in Investing and Lending

Decisions


Part B

Financial Accounting Information

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Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in

financial accounting

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Rules of Financial Accounting

Investors & Creditors

Financial Accounting Information

Generally Accepted Accounting Principles (GAAP)

Generally Accepted Accounting Principles (GAAP)

make their decisions based on

Should be based on formal standards

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Current Standard Setting

United States Global

Financial Accounting Standards Board (FASB)

Financial Accounting Standards Board (FASB)

International Accounting Standards Board (IASB) International Accounting Standards Board (IASB)

Governed by

Securities and Exchange Commission (SEC)

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Role of Auditors

Trained individuals hired by a company as an independent party to verify accuracy of that

company’s financial statements

Role of auditors

Help ensure that management has in fact

appropriately applied GAAP in preparing the company’s

financial statements

Help investors and creditors in their decisions by adding credibility to the

financial statements.

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Objectives of Financial Accounting

• Financial accounting should provide information that:• Is useful to investors and creditors in making

decisions• Helps to predict cash flow• Tells about economic resources, claims to

resources, and changes in resources and claims


Part C

Careers in Accounting

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Identify career opportunities in accounting

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Illustration 1.14—Some Career Options

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Illustration 1.14—Some Career Options



Explain the nature of the conceptual framework used to develop generally accepted accounting

principles

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Conceptual FrameworkAppendix

• Qualitative characteristics• Enhancing qualitative characteristics• Cost effectiveness constraint• Underlying assumptions

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Illustration 1.15—Qualitative Characteristics of Useful Financial Information

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Cost Effectiveness Constraint

• Cost constraint suggests that: • Financial accounting information is provided only

when the benefits of doing so exceed the costs

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Underlying Assumptions

Identify all economic events with a particular economic

entity

Need a unit or scale of measurement

Provide information of an enterprise at regular time

periods

Business entity will continue to operate indefinitely

Economic Entity Assumption

Monetary Unit Assumption

Periodicity Assumption

Going Concern Assumption


End of Chapter 1

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