Financial Reporting Fundamentals

Financial Reporting

• Purpose: to provide stakeholders with financial information about an organization
• Key elements:
  • Balance sheet: presents the organization's financial position at a specific point in time
  • Income statement: presents the organization's financial performance over a specific period of time
  • Cash flow statement: presents the organization's inflows and outflows of cash over a specific period of time
• Financial reporting frameworks:
  • Generally Accepted Accounting Principles (GAAP)
  • International Financial Reporting Standards (IFRS)

Accounting Standards

• Purpose: to ensure consistency and comparability in financial reporting
• Types of accounting standards:
  • GAAP (US)
  • IFRS (International)
  • Local standards (e.g. ASPE in Canada)
• Key accounting standards:
  • Accounting for assets (e.g. property, plant, and equipment)
  • Accounting for liabilities (e.g. accounts payable, long-term debt)
  • Accounting for equity (e.g. common stock, retained earnings)

Cost Accounting

• Purpose: to determine the cost of producing goods or services
• Key concepts:
  • Direct costs: directly traceable to the production of a good or service (e.g. labor, materials)
  • Indirect costs: not directly traceable to the production of a good or service (e.g. overhead)
  • Cost drivers: factors that influence the cost of production (e.g. volume, complexity)
• Cost accounting methods:
  • Job costing: assigns costs to specific jobs or projects
  • Process costing: assigns costs to specific processes or departments
  • Activity-based costing: assigns costs to specific activities or tasks

Auditing

• Purpose: to provide assurance that financial statements are accurate and reliable
• Types of audits:
  • Financial statement audit: examines the financial statements and underlying records
  • Operational audit: examines the organization's operations and internal controls
  • Compliance audit: examines the organization's compliance with laws and regulations
• Audit process:
  1. Planning: determine the scope and objectives of the audit
  2. Fieldwork: gather evidence and perform procedures
  3. Reporting: issue an audit report with findings and recommendations

Budgeting

• Purpose: to plan and manage an organization's financial resources
• Key concepts:
  • Budget: a financial plan that outlines projected income and expenses
  • Forecasting: predicting future financial outcomes
  • Variance analysis: analyzing the difference between actual and budgeted results
• Budgeting methods:
  • Incremental budgeting: based on previous year's budget with adjustments
  • Zero-based budgeting: starts from a "zero balance" and justifies every expense
  • Activity-based budgeting: allocates costs to specific activities or tasks

Financial Reporting

• Provides stakeholders with financial information about an organization
• Comprises three key elements:
  • Balance sheet: presents the organization's financial position at a specific point in time
  • Income statement: presents the organization's financial performance over a specific period of time
  • Cash flow statement: presents the organization's inflows and outflows of cash over a specific period of time
• Two main financial reporting frameworks:
  • Generally Accepted Accounting Principles (GAAP)
  • International Financial Reporting Standards (IFRS)

Accounting Standards

• Ensure consistency and comparability in financial reporting
• Types of accounting standards:
  • GAAP (US)
  • IFRS (International)
  • Local standards (e.g. ASPE in Canada)
• Key accounting standards:
  • Accounting for assets (e.g. property, plant, and equipment)
  • Accounting for liabilities (e.g. accounts payable, long-term debt)
  • Accounting for equity (e.g. common stock, retained earnings)

Cost Accounting

• Determines the cost of producing goods or services
• Key concepts:
  • Direct costs: directly traceable to the production of a good or service (e.g. labor, materials)
  • Indirect costs: not directly traceable to the production of a good or service (e.g. overhead)
  • Cost drivers: factors that influence the cost of production (e.g. volume, complexity)
• Cost accounting methods:
  • Job costing: assigns costs to specific jobs or projects
  • Process costing: assigns costs to specific processes or departments
  • Activity-based costing: assigns costs to specific activities or tasks

Auditing

• Provides assurance that financial statements are accurate and reliable
• Types of audits:
  • Financial statement audit: examines the financial statements and underlying records
  • Operational audit: examines the organization's operations and internal controls
  • Compliance audit: examines the organization's compliance with laws and regulations
• Audit process:
  • Planning: determine the scope and objectives of the audit
  • Fieldwork: gather evidence and perform procedures
  • Reporting: issue an audit report with findings and recommendations

Budgeting

• Plans and manages an organization's financial resources
• Key concepts:
  • Budget: a financial plan that outlines projected income and expenses
  • Forecasting: predicting future financial outcomes
  • Variance analysis: analyzing the difference between actual and budgeted results
• Budgeting methods:
  • Incremental budgeting: based on previous year's budget with adjustments
  • Zero-based budgeting: starts from a "zero balance" and justifies every expense
  • Activity-based budgeting: allocates costs to specific activities or tasks