Financial Accounting

1、Financial Accounting,John Shon,Financial Accounting,Financial Accounting Process by which the economic performance and financial position of the company are recorded and communicated to decision-makers outside the company Benefits: Helps decision-makers Facilitates contracting between parties: Betwe

2、en management and .? Managerial Accounting Process by which information is communicated internally Not covered in this course,Investors,Investment,Managers,Value creation,FINANCING ACTIVITIES,INVESTING ACTIVITIES,OPERATING ACTIVITIES,RETURNS,But how can investors be assured that managers: - Choose t

3、he right projects/investments? - Exert sufficient effort? - Adequately disclose relevant information? - Ultimately repay investors?,Investors,Investment,Managers,Value creation,FINANCING ACTIVITIES,INVESTING ACTIVITIES,OPERATING ACTIVITIES,RETURNS,“If you look at the history of the American capital

4、markets, theres probably no innovation more important than the idea of Generally Accepted Accounting Principles GAAP.” - Lawrence Summers, Former Secretary of the US Treasury it is a result of “social choice” No consensus on what is “best”,* Public hearings, letters, exposure drafts, media, lobbying

5、,Financial Accounting process,GAAP,Managements incentives and judgment,“Accrual” accounting system,Economic events,Financial statements,Financial Accounting is the process by which the economic performance and financial position of the firm are recorded and communicated to decision-makers outside th

6、e firm,A typical firms annual report contains: Financial statements (Form 10K) Balance sheet Income statement Statement of cash flows Statement of stockholders equity Footnotes: The devil is in the details MD&A: Management discussion and analysis Discusses key trends and provides important forward-l

7、ooking information Letter to shareholders Financial highlights, general description of business and risk factors,Annual report,Auditors report, with audit opinion Unqualified: “Clean” Qualified or modified: Explanatory language added to opinion*,* Due to going concern (e.g., near bankruptcy), materi

8、al uncertainty (e.g., litigation), inconsistency (e.g., accounting change),Financial statements,Balance sheet Provides a snapshot of the firms financial position: assets, liabilities, and owners equity Income statement Reports the firms operating performance: revenues and expenses Statement of cash

9、flows Reports the firms cash flow activities: how operating, investing, and financing activities have affected the firms cash balance Statement of stockholders equity Details how various activities have affected the firms equity balance,Statement of cash flows Year ended 12/31/2005,Articulation of f

10、inancial statements,Liabilities,Assets,Owners equity,Statement of Owners equity 12/31/2005,Income statement Year ended 12/31/2005,Balance sheet 12/31/2005,Beginning balance,Ending balance,Net income,Operating cash flows,Investing cash flows,Financing cash flows,Change in cash balance*,Net income,* The change in cash from the statement of cash flows helps us to arrive at the balance sheets final balance in cash,Where to find them,Several sources for financial statements Companys