Upload
nijith-nt
View
230
Download
0
Embed Size (px)
Citation preview
8/2/2019 Accounting Equ.
1/50
Accounting
Prof: Jim Wallace
TA: Charles Yeh
8/2/2019 Accounting Equ.
2/50
Overview of Week 1
Administrative stuff
What is financial accounting?
Financial statements GAAP
What number do you want?
8/2/2019 Accounting Equ.
3/50
Administrative Stuff
Who am I
Who is your T.A.
Teaching philosophy Syllabus
Homework
Calculator
8/2/2019 Accounting Equ.
4/50
Web Access to Class Info
The site should contain:
Syllabus PowerPoint slides
Handouts
Homework solutions
http://www.cgu.edu/pages/3471.asp
8/2/2019 Accounting Equ.
5/50
What is Financial Accounting?
A method to communicate financial informationto interested external parties.
Users include capital providers, regulators,customers, suppliers, employees, etc
Capital suppliers include debt and equity providers
Financial accounting is used for both prediction
and control
8/2/2019 Accounting Equ.
6/50
Some Preconceptions
- Misconceptions?
Accounting yields the truth.
Accounting is rigid.
Accounting is useless.Accounting is hard!
Accountants are boring.
8/2/2019 Accounting Equ.
7/50
Other Types of Accounting
Managerial
Non-profit
Tax
8/2/2019 Accounting Equ.
8/50
The Financial Statements
The accounting equation
Balance Sheet
Income Statement Statement of Cash Flows
Statement of Owners Equity
Statement of retained earnings
8/2/2019 Accounting Equ.
9/50
Balance Sheet
Mirrors the Accounting Equation
Assets = Liabilities + Equity
Uses of funds = Sources of fundsAssets are listed in order of liquidity
Current and non-current
Liabilities are listed in order of maturity
Equity consists of Contributed Capital andRetained Earnings
8/2/2019 Accounting Equ.
10/50
Assets
To be reported on a balance sheet, anasset must:
1. Be owned or controlled by thecompany
2. Must possess expected future
benefits
8/2/2019 Accounting Equ.
11/50
Most Assets are Reported at
Historical Cost
Historical Cost is
Objective
Verifiable
Therefore, not subject to bias
However, historical cost is not particularlyrelevant to most readers of the balance sheet
Relevance vs. Reliability is an important issue
with accountants.
8/2/2019 Accounting Equ.
12/50
Disneys Assets
8/2/2019 Accounting Equ.
13/50
Liabilities
Liabilities are listed in order of maturity
Current Liabilities come due in less than a year.
Noncurrent liabilities come due after a year.
Companies desire more current assets thancurrent liabilitiesthis difference is callednet working capital
8/2/2019 Accounting Equ.
14/50
Disneys Liabilities and Equity
8/2/2019 Accounting Equ.
15/50
Equity
Equity consists of:
Contributed Capital (cash raised from the
issuance of shares) Earned Capital (retained earnings). Retained
Earnings is updated each period as follows:
8/2/2019 Accounting Equ.
16/50
Market Value vs. Book Value
Stockholders equity = Company book value
Book value is determined using GAAP.
Book value is not the same as Market Value.
Market Value = # of Shares x Price per share
On average, US company book value is roughlytwo-thirds of market value.
8/2/2019 Accounting Equ.
17/50
Income Statement
8/2/2019 Accounting Equ.
18/50
Walt Disneys Income Statement
8/2/2019 Accounting Equ.
19/50
Accrual Accounting
Accrual accounting refers to the
recognition of revenue when earned(even if not received in cash) andthe matching of expenses when
incurred (even if not paid in cash).
8/2/2019 Accounting Equ.
20/50
Accrual Accounting
Accrual accounting rests on two guidingprinciples:
Revenue Recognition Principlerecord revenuewhen
Earned
Realized or Realizable
Matching Principlerecord expenses when
Incurred
Neither the recognition of revenue nor therecording of expense necessarily involves the
receipt or payment of cash
8/2/2019 Accounting Equ.
21/50
Statement of Stockholders Equity
Statement of Equity is a reconciliation of the
beginning and ending balances of
stockholders equity accounts.
Main equity categories are:
Contributed capital
Retained earnings (including Other
Comprehensive Income or OCI)
Treasury stock
8/2/2019 Accounting Equ.
22/50
Disneys Statement of Stockholders
Equity
8/2/2019 Accounting Equ.
23/50
Statement of Cash Flows
Statement of cash flows (SCF) reports cash
inflows and outflows
Cash flows are reported based on the three
business activities of a company:1. Operating activities: transactions related to the
operations of the business.
2. Investing activities: acquisitions and divestitures of
long-term assets3. Financing activities: issuances and payments toward
equity, borrowings, and long-term liabilities.
8/2/2019 Accounting Equ.
24/50
Walt Disney
Companys
Statement ofCash Flows
8/2/2019 Accounting Equ.
25/50
Articulation of Financial Statements
Financial statements are linked within andacross timethey articulate.
Balance sheet and income statement are
linked via retained earnings.Absent of equity transactions such as stock
issuances and purchases and dividend
payments, the change in stockholdersequity equals the income or loss for theperiod.
8/2/2019 Accounting Equ.
26/50
8/2/2019 Accounting Equ.
27/50
In Class Example
Baron Coburg
8/2/2019 Accounting Equ.
28/50
Oversight of Financial Accounting
GAAP
Oversight of Financial Accounting
SEC oversees all publicly traded companies
Financial Accounting Standards Board
(FASB)
Generally Accepted Accounting Principles
(GAAP)
B i A i d
8/2/2019 Accounting Equ.
29/50
Basic Assumptions and
Principles
Monetary Unit
Fiscal period
Going concern Objectivity (Reliability)
Consistency
Versus comparability
8/2/2019 Accounting Equ.
30/50
Question?
Financial statements must contain objective andverifiable numbers if they are to be useful. Yet,many estimates and subjective assumptions are
required for the preparation of these reports.Please reconcile these apparently inconsistentstatements.
E i h
8/2/2019 Accounting Equ.
31/50
Exception to the
Basic Principles
Materiality
Only transactions with amounts large enough tomake a difference are considered material
Non-material transactions can be treated in theeasiest manner
8/2/2019 Accounting Equ.
32/50
Information Beyond Financial
Statements
Management Discussion and Analysis
(MD&A)
Independent Auditor Report
Financial Statement Footnotes
8/2/2019 Accounting Equ.
33/50
Audit Report
Financial statementspresent fairlyand in all material respectscompany financial condition.
Financial statements are prepared in conformity with GAAP
Financial statements are managements responsibility. Auditor
responsibility is to express an opinion on those statements Auditing involves a sampling of transactions, not investigation
of each transaction
Audit opinion provides reasonable assurancethat the statements
are free ofmaterialmisstatements Auditors review accounting policies used by management and
estimates used in preparing the statements
8/2/2019 Accounting Equ.
34/50
Question?
The SEC requires all publicly traded companies tohave their financial statements audited. Prior tothis requirement many companies voluntarily
had their statements audited. Given the costand inconvenience, why would they do this?
8/2/2019 Accounting Equ.
35/50
8/2/2019 Accounting Equ.
36/50
What Number Do You Want?
Accounting is a political process, not an exactscience.
There is a great deal of discretion available tomanagers.
8/2/2019 Accounting Equ.
37/50
Earnings Management
Reasons to manage earnings
ACCOUNTING NUMBERS HAVE
ECONOMIC CONSEQUENCES BEYOND
SIMPLY RECORDING TRANSACTIONS
8/2/2019 Accounting Equ.
38/50
Earnings Management - Why
Compensation contracts
Debt contracts
Political considerations
8/2/2019 Accounting Equ.
39/50
Transaction Analysis
Transaction analysis is the process of identifying
impacts of transactions and events on the balance
sheet, income statement, or both.
We use the following template:
8/2/2019 Accounting Equ.
40/50
Journal Entries
8/2/2019 Accounting Equ.
41/50
Transaction Analysis
8/2/2019 Accounting Equ.
42/50
Credit Sales Transaction
8/2/2019 Accounting Equ.
43/50
Accrued Expense Transaction
8/2/2019 Accounting Equ.
44/50
Deferred Revenue Transaction
8/2/2019 Accounting Equ.
45/50
Asset Write-Down
(Impairment) Transaction
8/2/2019 Accounting Equ.
46/50
Takeaways
Financial statements that are produced are theresult of one possible set of rules that haveresulted from a political process.
Users need to be aware of these limitations.
Users should read the notes to the financialstatements since these contain a lot of useful
guidance to interpreting the statements.
8/2/2019 Accounting Equ.
47/50
Financial Statement Limitations
Assets are valued at historical cost less anestimated depreciation
Other possibilities include cost, net realizable value,
replacement cost, price level adjusted
Not all assets appear
Human capital, internally generated goodwill
Could be argued that approach is more conservative
8/2/2019 Accounting Equ.
48/50
Financial Statement Limitations
Not all liabilities appear
Contingencies appear only in the footnotes
Off balance sheet financing
Other limitations include management biasesand a lack of timeliness
Fi i l A i
8/2/2019 Accounting Equ.
49/50
Financial Accounting:
not an exact science
GAAP allows companies choices in preparingfinancial statements (inventories, property, andequipment).
Financial statements also depend on countlessestimates.
8/2/2019 Accounting Equ.
50/50
Financial Accounting in Context
A companys financial statements only tell part
of the story.
You must continually keep in mind the world in
which the company operates.
Financial statement analysis must be conductedwithin the framework of a thorough
understanding of the broader forces whichimpact company performance.