week 1 slides s06 2 accounting

Accounting Prof: Jim Wallace TA: Charles Yeh Overview of Week      Administrative stuff What is financial accounting? Financial statements GAAP What number you want? Administrative Stuff     Who am I Who is your T.A Teaching philosophy Syllabus   Homework Calculator Web Access to Class Info  The site should contain:  Syllabus  PowerPoint slides  Handouts  Homework solutions  http://www.cgu.edu/pages/3471.asp What is Financial Accounting?   A method to communicate financial information to 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 Some Preconceptions - Misconceptions?      Accounting yields the “truth.” Accounting is rigid Accounting is useless Accounting is hard! Accountants are boring Other Types of Accounting    Managerial Non-profit Tax The Financial Statements      The accounting equation Balance Sheet Income Statement Statement of Cash Flows Statement of Owners Equity  Statement of retained earnings Balance Sheet  Mirrors the Accounting Equation Assets = Liabilities + Equity Uses of funds = Sources of funds  Assets are listed in order of liquidity    Current and non-current Liabilities are listed in order of maturity Equity consists of Contributed Capital and Retained Earnings Assets To be reported on a balance sheet, an asset must: Be owned or controlled by the company Must possess expected future benefits What Number Do You Want?  Accounting is a political process, not an exact science  There is a great deal of discretion available to managers Earnings Management  Reasons to manage earnings  ACCOUNTING NUMBERS HAVE ECONOMIC CONSEQUENCES BEYOND SIMPLY RECORDING TRANSACTIONS Earnings Management - Why  Compensation contracts  Debt contracts  Political considerations 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: Journal Entries Transaction Analysis Credit Sales Transaction Accrued Expense Transaction Deferred Revenue Transaction Asset Write-Down (Impairment) Transaction Takeaways    Financial statements that are produced are the result of one possible set of rules that have resulted from a political process Users need to be aware of these limitations Users should read the notes to the financial statements since these contain a lot of useful guidance to interpreting the statements Financial Statement Limitations  Assets are valued at historical cost less an estimated 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 Financial Statement Limitations   Not all liabilities appear  Contingencies appear only in the footnotes  Off balance sheet financing Other limitations include management biases and a lack of timeliness Financial Accounting: not an exact science   GAAP allows companies choices in preparing financial statements (inventories, property, and equipment) Financial statements also depend on countless estimates Financial Accounting in Context    A company’s 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 conducted within the framework of a thorough understanding of the broader forces which impact company performance [...]... is roughly two-thirds of market value Income Statement Walt Disney’s Income Statement Accrual Accounting Accrual accounting refers to the recognition of revenue when earned (even if not received in cash) and the matching of expenses when incurred (even if not paid in cash) Accrual Accounting    Accrual accounting rests on two guiding principles: Revenue Recognition Principle – record revenue when... stockholders’ equity equals the income or loss for the period In Class Example  Baron Coburg 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) Basic Assumptions and Principles      Monetary Unit Fiscal period Going concern Objectivity... Statement of Stockholders’ Equity 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 2 3 Operating activities: transactions related to the operations of the business Investing activities: acquisitions and divestitures of long-term assets Financing activities: issuances and payments toward... misstatements Auditors review accounting policies used by management and estimates used in preparing the statements Question? The SEC requires all publicly traded companies to have their financial statements audited Prior to this requirement many companies voluntarily had their statements audited Given the cost and inconvenience, why would they do this? What Number Do You Want?  Accounting is a political