Intermediate Accounting IGreg Sommers, PhD CPA

gsommers@smu.eduhttp://gsommers.cox.smu.edu/acct3311/

https://www.facebook.com/groups/312531215573126/

Syllabus

• It is our contract to protect you, me and your fellow students.

• Read it, know it.

Expectations – Content

• Accounting is different than 8th grade social science where you learned it and then after the test could forget it. The content you learn in each accounting course is the basis for the next course and must be retained.

• You are expected to know and be ready to use what you learned in Introductory Financial Accounting.– Solid Footing

• Chapter 3 is essentially a review of Introductory Financial Accounting. Chapter 6 is Time Value of Money which most have learned in prior classes.

Expectations – Behavior

• Be ready to begin the discussion promptly and attend the section for which you registered.– Your superiors, peers, and client personnel will have the

same expectations in your firm and client assignments. 

• You are to occupy available seats from the front of the classroom first.– Your superiors and clients would not expect you to sit a

significant distance away during meetings/interactions.

• The use of laptop and other hand-held devices and/or audio/video recording devices during the class period is restricted without prior written consent. – These devices are distracting and their use has the ability

to cause others to be skeptical of your intentions and commitment.

CHAPTER 1

FINANCIAL ACCOUNTING AND ACCOUNTING STANDARDS

Sommers – ACCT 3311

Discussion Question

Q1-1 Differentiate broadly between financial accounting and managerial accounting.

Discussion Question

Q1-4 What is the objective of financial reporting?

What is the primary objective of financial accounting?

The primary objective of financial accounting is to provide

financial information about the reporting entity that is

useful to

present and potential equity investors,

lenders, and

other creditors

in making decisions in their capacity as capital providers.

Objective of Accounting

Discussion Question

Q1-7 What is the likely limitation of “general-purpose financial statements”?

Equity Investors and Creditors

Investors are the primary user group.

General-Purpose Financial Statements

Provide financial reporting information to a wide variety

of users.

Provide the most useful information possible at the

least cost.

Objective of Financial Accounting

Decision-Usefulness

Investors are interested in assessing the company’s

1. ability to generate net cash inflows and

2. management’s ability to protect and enhance the capital

providers’ investments.

Entity Perspective

Companies viewed as separate and distinct from their

owners.

Objective of Financial Accounting

Investment-Credit Decisions ─A Cash Flow Perspective

Accounting information should help investors evaluate the amount, timing, and uncertainty

of the enterprise’s future cash flows.

Shareholders Receive

Cash

1. Dividends2. Sale of Stock

Creditors Receive

Cash

1. Interest2. Loan Repayment

What do the numbers mean? (p. 5)

“It’s the accounting.” That’s what many investors seem to be saying these days. Even the slightest hint of any accounting irregularity at a company leads to a subsequent pounding of the company’s stock price. For example, the Wall Street Journal has run the following headlines related to accounting and its effects on the economy. • Stocks take a beating as accounting woes spread beyond Enron.• Quarterly reports from IBM and Goldman Sachs sent stocks tumbling.• VeriFone finds accounting issues; stock price cut in half.• Bank of America admits hiding debt.• Facebook, Zynga, Groupon: IPO drops due to accounting, not

valuation.

It now has become clear that investors must trust the accounting numbers, or they will abandon the market and put their resources elsewhere. With investor uncertainty, the cost of capital increases for companies who need additional resources. In short, relevant and reliable financial information is necessary for markets to be efficient.

What do the numbers mean? (p. 6)

In addition to providing decision-useful information about future cash flows, management also is accountable to investors for the custody and safekeeping of the company’s economic resources and for their efficient and profitable use. For example, the management of The Hershey Company has the responsibility for protecting its economic resources from unfavorable effects of economic factors, such as price changes, and technological and social changes.

Because Hershey’s performance in discharging its responsibilities (referred to as its stewardship responsibilities) usually affects its ability to generate net cash inflows, financial reporting may also provide decision-useful information to assess management performance in this role.

Financial Accounting Environment

• Relevant financial information is provided primarily through financial statements and related disclosure notes.– Balance Sheet– Income Statement– Statement of Cash Flows– Statement of Shareholders’ Equity

What the public thinks accountants should do vs. what accountants think they can do.

– Difficult to close in light of accounting scandals.– Sarbanes-Oxley Act (2002).– Public Company Accounting Oversight Board

(PCAOB).

Expectation GAAP

Financial Reporting Challenges

• Non-financial measurements.• Forward-looking information.• Soft assets.• Timeliness• Understandability