Financial Accounting

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Financial Accounting

• The Basis for Business Decisions

THIRTEENTH EDITION

Williams Haka Bettner Carcello
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Chapter1
AccountingInformation for Decision Making
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Learning Objective
To discuss accounting as the language of business
and the role of accounting information in making
economic decisions.
LO1
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Financial Reporting
What is Financial Reporting ? Financial Reporting
is way of recording, analyzing and summarizing
financial data. Financial data is the name given
to the actual transactions carried out by a
business.
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Business Types of Business
What is business? Businesses of whatever sizes or
nature exist to make a profit. Commercial or
Industrial concern deals in manufacture and
resale of goods ad services. Organizations which
uses economic resources to create goods and
services Organization providing jobs for
people Invests money in resources to generate
more for owners. (Profit) Measuring Profit,
Revenues and Expenses Etc.
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Types of Business
Types of Business Sole Proprietor (Sole
Traders) Partnerships Corporations (Limited
Liability Companies)
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The accounting process
Accounting links decision makers with economic
activities ¾ and with the results of their
decisions.
Accounting information
Economic activities
Actions (decisions)
Decision makers
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Types of Accounting Information
Financial
Tax
Managerial
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Learning Objective
To discuss the significance of accounting systems
in generating reliable accounting information,
and understand the five components of internal
control per COSOs Internal ControlIntegrated
Framework.
LO2
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Accounting Systems
An accounting system consists of the personnel,
procedures, technology, and records used by an
organization to develop accounting information
and to communicate this information to decision
makers.
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Information System

• Information Users
• Investors
• Creditors
• Managers
• Owners
• Customers
• Employees
• Regulators -SEC
• -IRS
• -FTC

• Decisions Supported
• Performance evaluations
• Stock investments
• Tax strategies
• Labor relations
• Resource allocations
• Lending decisions
• Borrowing

• Financial Information Provided
• Profitability
• Financial position
• Cash flows

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Basic Functions of an Accounting System

• Interpret and record business transactions.

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External Users of Accounting Information

• Owners
• Creditors
• Potential investors
• Labor unions
• Governmental agencies
• Suppliers
• Customers
• Trade associations
• General public

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Objectives of External Financial Reporting

• The primary financial statements.

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Users of Internal Accounting Information

• Board of directors
• Chief executive officer (CEO)
• Chief financial officer (CFO)
• Vice presidents
• Business unit managers
• Plant managers
• Store managers
• Line supervisors

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Objectives of Management Accounting Information
To help achieve goals and missions
To help evaluate and reward decision makers
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The Regulatory System

• A number of factors have shaped the development
  of financial accounting, few are
• National / Local legislation
• Accounting Concepts and Individual judgement
• Accounting Standards (IASs and IFRSs)
• National and International Standards
• Other International Influences SAC, IFRIC,
  IASCF
• Generally Accepted Accounting Principles (GAAP)
• Fair presentation

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Introduction to Accounting Principles and GAAP

• There are general rules and concepts that govern
  the field of accounting. These general
  rulesreferred to as basic accounting principles
  and guidelinesform the groundwork on which more
  detailed, complicated, and legalistic accounting
  rules are based.
• For example, the Financial Accounting Standards
  Board (FASB) uses the basic accounting principles
  and guidelines as a basis for their own detailed
  and comprehensive set of accounting rules and
  standards.
• Both the company's management and the independent
  accountants must certify that the financial
  statements and the related notes to the financial
  statements have been prepared in accordance with
  GAAP.

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Basic Accounting Principles and Guidelines

• Since GAAP is founded on the basic accounting
  principles and guidelines, we can better
  understand GAAP if we understand those accounting
  principles.
• Following are the ten main accounting principles
  and guidelines together with a highly condensed
  explanation of each.

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Basic Accounting Principles

• Business Entity Assumption
• The accountant keeps all of the business
  transactions of a sole proprietorship separate
  from the business owner's personal transactions.
  For legal purposes, a sole proprietorship and its
  owner are considered to be one entity, but for
  accounting purposes they are considered to be two
  separate entities.
• Owner is separate from business

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Basic Accounting Principles

• Stable Dollar Assumption
• Economic activity is measured in U.S. dollars,
  and only transactions that can be expressed in
  U.S. dollars are recorded.
• This principle assumes that the dollar units
  being used as the basis for recording economic
  events is stable and that no price-level
  fluctuations are large enough to have a material
  effect.

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Basic Accounting Principles

• Time Period Assumption
• This accounting principle assumes that it is
  possible to report the complex and ongoing
  activities of a business in relatively short,
  distinct time intervals. The shorter the time
  interval, the more likely the need for the
  accountant to estimate amounts relevant to that
  period.
• Complete financial statements are prepared at
  regular intervals - normally a year.

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Basic Accounting Principles

• Cost Principle
• From an accountant's point of view, the term
  "cost" refers to the amount spent when an item
  was originally obtained, whether that purchase
  happened last year or thirty years ago. For this
  reason, the amounts shown on financial statements
  are referred to as historical cost amounts.
• Because of this accounting principle asset
  amounts are not adjusted upward for inflation. In
  fact, as a general rule, asset amounts are not
  adjusted to reflect any type of increase in
  value.

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Basic Accounting Principles

• Full Disclosure
• If certain information is important to an
  investor or lender using the financial
  statements, that information should be disclosed
  within the statement or in the notes to the
  statement. It is because of this basic accounting
  principle that numerous pages of "footnotes" are
  often attached to financial statements.
• A company usually lists its significant
  accounting policies as the first note to its
  financial statements.
• Any events subsequent to the year-end but prior
  to reporting should be described in the notes to
  the financial statements.

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Basic Accounting Principles

• Going Concern Principle
• This accounting principle assumes that a company
  will continue to exist long enough to carry out
  its objectives and commitments and will not
  liquidate in the foreseeable future. If the
  company's financial situation is such that the
  accountant believes the company will not be able
  to continue on, the accountant is required to
  disclose this assessment.

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Basic Accounting Principles

• Matching Principle
• This accounting principle requires companies to
  use the accrual basis of accounting. The matching
  principle requires that expenses be matched with
  revenues. For example, sales commissions expense
  should be reported in the period when the sales
  were made (and not reported in the period when
  the commissions were paid). Wages to employees
  are reported as an expense in the week when the
  employees worked and not in the week when the
  employees are paid.
• Record all the necessary expenses that are
  incurred for generating Revenue of one accounting
  period

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Basic Accounting Principles

• Realisation Principle
• Under the accrual basis of accounting (as opposed
  to the cash basis of accounting), revenues are
  recognized as soon as a product has been sold or
  a service has been performed, regardless of when
  the money is actually received. Under this basic
  accounting principle, a company could earn and
  report 20,000 of revenue in its first month of
  operation but receive 0 in actual cash in that
  month.

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What is GAAP?

• Materiality
• Because of this basic accounting principle or
  guideline, an accountant might be allowed to
  violate another accounting principle if an amount
  is insignificant. Professional judgment is needed
  to decide whether an amount is insignificant or
  immaterial.
• An item small enough in value as to have no
  effect on decisions need not follow generally
  accepted accounting principles

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Basic Accounting Principles

• Conservatism
• If a situation arises where there are two
  acceptable alternatives for reporting an item,
  conservatism directs the accountant to choose the
  alternative that will result in less net income
  and/or less asset amount. Conservatism does not
  direct accountants to be conservative.
  Accountants are expected to be unbiased and
  objective.
• Conservatism leads accountants to anticipate or
  disclose losses, but it does not allow a similar
  action for gains. For example, potential losses
  from lawsuits will be reported on the financial
  statements or in the notes, but potential gains
  will not be reported.

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Other Characteristics of Accounting Information

• When financial reports are generated by
  professional accountants, we have certain
  expectations of the information they present to
  us
• We expect the accounting information to be
  reliable, verifiable, and objective.
• We expect consistency in the accounting
  information.
• We expect comparability in the accounting
  information.

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Learning Objective
To discuss elements of the system of external and
internal financial reporting that create
integrity in the reported information.
LO5
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Integrity of Accounting Information

• Institutional Features
• Generally Accepted Accounting Principles (GAAP)
• Financial Accounting Standards Board
• International Accounting Standards Board
• Securities and Exchange Commission
• Public Company Accounting Oversight Board
• Audits of Financial Statements
• Legislation

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Learning Objective
To identify and discuss several professional
organizations that play important roles in
preparing and communicating accounting
information.
LO6
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Integrity of Accounting Information

• Professional Organizations
• American Institute of Certified Public
  Accountants
• Institute of Management Accountants
• Institute of Internal Auditors
• American Accounting Association
• Committee of Sponsoring Organizations of the
  Treadway Commission (COSO)

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Learning Objective
To discuss the importance of personal competence,
professional judgment, and ethical behavior on
the part of accounting professionals.
LO7
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Integrity of Accounting Information

• Competence, Judgment and Ethical Behavior
• Certified Public Accountants (CPAs)
• Certificate in Management Accounting (CMA)
• Certificate in Internal Auditing (CIA)

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Learning Objective
To discuss various career opportunities in
accounting.
LO8
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Careers in Accounting

• Public Accounting
• Management Accounting
• Governmental Accounting
• Accounting Education

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End of Chapter 1