MBAAccounting.ppt

Accounting,Prof:JimWallaceTA:Golf,OverviewofWeek1,AdministrativestuffWhatisfinancialaccounting?SomeMythsAccrualversusCash-basedFinancialstatementsGAAPAuditing,AdministrativeStuff,WhoamIWhoisyourT.A.TeachingphilosophySyllabusHomeworkCalculator,WebAccesstoClassInfo,Thesiteshouldcontain:SyllabusPowerPointslidesHandoutsHomeworksolutions/pages/3472.asp,WhatisFinancialAccounting?,Amethodtocommunicatefinancialinformationtointerestedexternalparties.Usersincludecapitalproviders,regulators,customers,suppliers,employees,etcCapitalsuppliersincludedebtandequityprovidersFinancialaccountingisusedforbothpredictionandcontrol,Accountingisrigidandyieldsthetruth,Generally-acceptedaccountingprinciples,orGAAP,areasetofrigidrulesthat,iffollowedcorrectly,willleadtoaunique,“correct”representationofthefinancialperformanceandhealthofafirm.Thebasicfinancialstatements,consistingofabalancesheet,anincomestatement,andastatementofcashflows,reflectacomplete,accurate,andtimelyportrayalofthefinancialperformanceandwell-beingofafirm,Accountingisthesoleproductofaccountants,GAAPiscreatedfromacomprehensiveanalyticalprocess,whichisfreefrompoliticalinfluence.,Itisallthere,Allofafirmsidentifiableassetsandliabilitiesappearonthebalancesheet,andthedifferencebetweenafirmsassetsanditsliabilitiesrepresentsthevalueofthefirm.,Thestatementsstandalone,Eachofthefinancialstatementsisindependent,witheachreflectingadifferentaspectofthefirmsperformanceandfinancialhealth.,CashisKing!,Cashflowisultimatelywhatmatterstoafirmanditsinvestors;therefore,itisnotreallynecessarytoworryaboutthedefinitionofearningsusedinthepreparationoftheincomestatement.Rather,oneneedonlyconsiderthesourcesandusesofcashasreflectedonthefirmsstatementofcashflows.,Someadditionalmyths,Accountingisuseless.Accountingishard!Accountantsareboring.,OtherTypesofAccounting,ManagerialNon-profitTax,AccrualAccounting,Accrualaccountingrestsontwoguidingprinciples:RevenueRecognitionPrinciplerecordrevenuewhenEarnedRealizedorRealizableMatchingPrinciplerecordexpenseswhenIncurredNeithertherecognitionofrevenuenortherecordingofexpensenecessarilyinvolvesthereceiptorpaymentofcash,Howdoyoudefinearichperson?,Hasalotofvaluablestuff(worthmorethanwhatisowed).Makesalotofmoney,TheFinancialStatements,TheaccountingequationBalanceSheetIncomeStatementStatementofCashFlowsStatementofOwnersEquityStatementofretainedearnings,BalanceSheet,MirrorstheAccountingEquationAssets=Liabilities+EquityUsesoffunds=SourcesoffundsAssetsarelistedinorderofliquidityCurrentandnon-currentLiabilitiesarelistedinorderofmaturityEquityconsistsofContributedCapitalandRetainedEarnings,Assets,Tobereportedonabalancesheet,anassetmust:BeownedorcontrolledbythecompanyMustpossessexpectedfuturebenefits,MostAssetsareReportedatHistoricalCost,HistoricalCostisObjectiveVerifiableTherefore,notsubjecttobiasHowever,historicalcostisnotparticularly“relevant”tomostreadersofthebalancesheet“Relevancevs.Reliability”isanimportantissuewithaccountants.,Liabilities,LiabilitiesarelistedinorderofmaturityCurrentLiabilitiescomedueinlessthanayear.Noncurrentliabilitiescomedueafterayear.Companiesdesiremorecurrentassetsthancurrentliabilitiesthisdifferenceiscallednetworkingcapital,Equity,Equityconsistsof:ContributedCapital(cashraisedfromtheissuanceofshares)EarnedCapital(retainedearnings).RetainedEarningsisupdatedeachperiodasfollows:,MarketValuevs.BookValue,Stockholdersequity=CompanybookvalueBookvalueisdeterminedusingGAAP.BookvalueisnotthesameasMarketValue.MarketValue=#ofSharesxPricepershareOnaverage,UScompanybookvalueisroughlytwo-thirdsofmarketvalue.,IncomeStatement,StatementofStockholdersEquity,StatementofEquityisareconciliationofthebeginningandendingbalancesofstockholdersequityaccounts.Mainequitycategoriesare:ContributedcapitalRetainedearnings(includingOtherComprehensiveIncomeorOCI)Treasurystock,StatementofCashFlows,Statementofcashflows(SCF)reportscashinflowsandoutflowsCashflowsarereportedbasedonthethreebusinessactivitiesofacompany:Operatingactivities:transactionsrelatedtotheoperationsofthebusiness.Investingactivities:acquisitionsanddivestituresoflong-termassetsFinancingactivities:issuancesandpaymentstowardequity,borrowings,andlong-termliabilities.,ArticulationofFinancialStatements,Financialstatementsarelinkedwithinandacrosstimetheyarticulate.Balancesheetandincomestatementarelinkedviaretainedearnings.Absentofequitytransactionssuchasstockissuancesandpurchasesanddividendpayments,thechangeinstockholdersequityequalstheincomeorlossfortheperiod.,InClassExample,BaronCoburg,OversightofFinancialAccounting,GAAPOversightofFinancialAccountingSECoverseesallpubliclytradedcompaniesFinancialAccountingStandardsBoard(FASB)GenerallyAcceptedAccountingPrinciples(GAAP),BasicAssumptionsandPrinciples,MonetaryUnitFiscalperiodGoingconcernObjectivity(Reliability)ConsistencyVersuscomparability,Question?,Financialstatementsmustcontainobjectiveandverifiablenumbersiftheyaretobeuseful.Yet,manyestimatesandsubjectiveassumptionsarerequiredforthepreparationofthesereports.Pleasereconciletheseapparentlyinconsistentstatements.,ExceptiontotheBasicPrinciples,MaterialityOnlytransactionswithamountslargeenoughtomakeadifferenceareconsideredmaterialNon-materialtransactionscanbetreatedintheeasiestmanner,InformationBeyondFinancialStatements,ManagementDiscussionandAnalysis(MD&A)IndependentAuditorReportFinancialStatementFootnotes,AuditReport,Financialstatementspresentfairlyandinallmaterialrespectscompanyfinancialcondition.FinancialstatementsarepreparedinconformitywithGAAPFinancialstatementsaremanagementsresponsibility.AuditorresponsibilityistoexpressanopiniononthosestatementsAuditinginvolvesasamplingoftransactions,notinvestigationofeachtransactionAuditopinionprovidesreasonableassurancethatthestatementsarefreeofmaterialmisstatementsAuditorsreviewaccountingpoliciesusedbymanagementandestimatesusedinpreparingthestatements,Question?,TheSECrequiresallpubliclytradedcompaniestohavetheirfinancialstatementsaudited.Priortothisrequirementmanycompaniesvoluntarilyhadtheirstatementsaudited.Giventhecostandinconvenience,whywouldtheydothis?,Takeaways,Financialstatementsthatareproducedaretheresultofonepossiblesetofrulesthathaveresultedfromapoliticalprocess.Usersneedtobeawareoftheselimitations.Usersshouldreadthenotestothefinancialstatementssincethesecontainalotofusefulguidancetointerpretingthestatements.,FinancialStatementLimitations,AssetsarevaluedathistoricalcostlessanestimateddepreciationOtherpossibilitiesincludecost,netrealizablevalue,replacementcost,priceleveladjustedNotallassetsappearHumancapital,interna