Lesson 1 - Introduction to Accounting and Basic Financial Statements PDF

Lecture Outline Corporate Investment and Financing Decisions Introduction The Role of the Financial Manager and the to Accounting and Opportunity Cost of Capital Lesson Goals 1 of the Corporation...

Lecture Outline Corporate Investment and Financing Decisions Introduction The Role of the Financial Manager and the to Accounting and Opportunity Cost of Capital Lesson Goals 1 of the Corporation BasicGovernance Agency Problems and Corporate Financial Statements  Learning Outcomes  Introduction to Financial Statements  The Importance of Accounting  Ethics and GAAP  The Accounting Equation Introduction to Financial Statements Introduction to Financial Statements Investors and creditors are interested in the cash flows that they expect to receive in the future. Creditors are interested in the ability of an enterprise to meet its payment obligations, which may include payment of interest. Investors are interested in the market value of their stock holdings and any dividends they might receive. Financial Statements A financial statement is simply a declaration of what is believed to be true about an enterprise, communicated in terms of a monetary unit, such as the dollar. When accountants prepare financial statements, they are describing in financial terms certain attributes of the enterprise that they believe fairly represent its financial activities. Three Primary Financial Statements Statement of financial position (often referred to as the balance sheet) Income statement Statement of cash flows KEY POINT While examining the financial statements in this section, we will be assuming the corporate form of business ownership. Financial Statements: Balance Sheet 1. Statement of Financial Position (Balance Sheet) a. Describes where the enterprise stands at a specific date. b. A snapshot of the business in financial or dollar terms that shows what the enterprise looks like at a specific date. Financial Statements: Income Statement 2. Income Statement a. An activity statement that shows the revenues and expenses for a designated period of time. b. Revenues generate positive cash flows through transactions with customers. c. Expenses generate negative cash flows (outflows of cash) through business activities. Financial Statements: Statement of Cash Flows 3. Statement of Cash Flows a. Details the company’s sources and uses of cash during an accounting period. b. Enables the financial statement user to better understand the change in the cash balance shown on the comparative balance sheet. A Starting Point: Statement of Financial Position The Importance of Accounting Importance of Accounting Accounting is an information and measurement system that identifies, records, and communicates an organization’s business activities. 12  Users of Accounting Information Accounting is called the language of business because it communicates data to help people make better decisions. People using accounting information are divided into two groups: external users and internal users. Shareholders Purchasing managers Lenders Human resource managers External auditors Production managers Nonmanagerial employees Research and development managers Regulators Marketing managers 13 Opportunities in Accounting The majority of opportunities are in private accounting, where employees work for a business. Public accounting includes auditing, taxation, and advisory services. 14 Artificial Intelligence and Data Analytics Artificial Intelligence (AI) uses software and can be used to complete repetitive tasks such as entering invoices and transaction data. Accountants are needed to help develop advanced AI systems and analyze reports and graphics. Data analytics is a process of analyzing data to identify meaningful relations and trends. Data visualization is a graphical presentation of data to help individuals make informed business decisions. 15 Ethics and GAAP Ethics – A Key Concept The goal of accounting is to provide useful information for decisions. For information to be useful, it must be trusted. This demands ethics in accounting. Ethics are beliefs that distinguish right from wrong. They are accepted standards of good and bad behavior. 17  Fraud Triangle Three factors must exist for a person to commit fraud: opportunity, pressure, and rationalization. Envisions a way to commit Fails to see the criminal fraud with low risk of getting nature of the fraud or caught justifies the action Must have some pressure to commit fraud, like unpaid bills 18  Generally Accepted Accounting Principles (GAAP) Financial accounting is governed by concepts and rules known as generally accepted accounting principles (GAAP). GAAP wants information to have relevance and faithful representation. Relevant information Faithful representation affects decisions means information of users. accurately reflects business results. 19 Financial Accounting Standards Board (FASB) The FASB sets GAAP. Authority provided by the Securities and Exchange Commission (SEC). The SEC is a U.S. government agency that oversees GAAP by companies that sell stock and debt to the public. 20 International Standards In today’s global economy, there is increased demand by external users for comparability in accounting reports. International Accounting Standards Board (IASB) Issues International Financial Reporting Standards (IFRS). Standards identify preferred accounting practices. Standards are similar to, but sometimes different from U.S. GAAP. FASB and IASB are working to reduce differences. 21 Conceptual Framework Objectives – provide useful information to investors, creditors, and others. Qualitative characteristics – information has relevance and faithful representation. Elements – defines items in financial statements. Recognition and measurement – criteria for an item to be recognized as an element and how to measure it. 22 Principles, Assumptions and Constraint General principles are the Specific principles are detailed rules assumptions, concepts, and used in reporting business guidelines for preparing financial transactions and events. statements. 23  Accounting Principles Measurement Principle Revenue Recognition Principle (Cost Principle) 1. Recognize revenue when goods or Accounting information is based on services are provided to customers actual cost. Actual cost is and considered objective. 2. at an amount expected to be received from the customer. Expense Recognition Principle Full Disclosure Principle (Matching Principle) A company reports the details behind A company records its expenses financial statements that would impact incurred to generate the revenue users’ decisions in the notes to the reported. financial statements. 24 Accounting Assumptions Going-Concern Assumption Monetary Unit Assumption The business is presumed to Transactions and events are continue operating instead of being expressed in monetary, or closed or sold. money, units. Time Period Assumption Business Entity Assumption The life of a company A business is accounted for can be divided into time periods, separately from other business such as months and years. entities, including its owner. 25 Proprietorship, Partnership, and Corporation Here are some of the major attributes of sole proprietorships, partnerships, corporations, and limited liability companies (LLC): 26 Accounting Constraints Cost-benefit constraint Only information with benefits of disclosure greater than the cost need be disclosed. Materiality constraint Only information that would influence the decisions of a reasonable person need be disclosed. Conservatism and industry practices are sometimes included as a constraint, also. 27 The Accounting Equation Business Transactions and Accounting The Accounting Equation Assets = Liabilities + Equity Expanded Accounting Equation: Net Income 29  Introduction to Accounting and Lesson 1 Basic Financial Statements