MBAAccounting

1、AccountingProf: Jim WallaceTA: GolfOverview of Week 1Administrative stuffWhat is financial accounting?Some MythsAccrual versus Cash-basedFinancial statementsGAAPAuditingAdministrative StuffWho am IWho is your T.A.Teaching philosophySyllabuslHomeworkCalculatorWeb Access to Class InfoWhat is Financial

2、 Accounting?A method to communicate financial information to interested external parties.Users include capital providers, regulators, customers, suppliers, employees, etc Capital suppliers include debt and equity providersFinancial accounting is used for both prediction and controlAccounting is rigi

3、d and yields the truthGenerally-accepted accounting principles, or GAAP, are a set of rigid rules that, if followed correctly, will lead to a unique, “correct” representation of the financial performance and health of a firm. The basic financial statements, consisting of a balance sheet, an income s

4、tatement, and a statement of cash flows, reflect a complete, accurate, and timely portrayal of the financial performance and well-being of a firm Accounting is the sole product of accountantsGAAP is created from a comprehensive analytical process, which is free from political influence.It is all the

5、reAll of a firms identifiable assets and liabilities appear on the balance sheet, and the difference between a firms assets and its liabilities represents the value of the firm.The statements stand aloneEach of the financial statements is independent, with each reflecting a different aspect of the f

6、irms performance and financial health.Cash is King!Cash flow is ultimately what matters to a firm and its investors; therefore, it is not really necessary to worry about the definition of earnings used in the preparation of the income statement. Rather, one need only consider the sources and uses of

7、 cash as reflected on the firms statement of cash flows.Some additional mythsAccounting is useless.Accounting is hard!Accountants are boring.Other Types of AccountingManagerialNon-profitTaxAccrual AccountingAccrual accounting rests on two guiding principles:Revenue Recognition Principle record reven

8、ue whenlEarnedlRealized or RealizableMatching Principle record expenses whenlIncurredNeither the recognition of revenue nor the recording of expense necessarily involves the receipt or payment of cashHow do you define a rich person?Has a lot of valuable stuff (worth more than what is owed).Makes a l

9、ot of moneyThe Financial StatementsThe accounting equationBalance SheetIncome StatementStatement of Cash FlowsStatement of Owners Equity lStatement of retained earningsBalance SheetMirrors the Accounting Equation Assets = Liabilities + EquityUses of funds = Sources of fundsAssets are listed in order

10、 of liquiditylCurrent and non-current Liabilities are listed in order of maturityEquity consists of Contributed Capital and Retained Earnings AssetsTo be reported on a balance sheet, an asset must:1.Be owned or controlled by the company2.Must possess expected future benefitsMost Assets are Reported

11、at Historical CostHistorical Cost islObjectivelVerifiablelTherefore, not subject to biasHowever, historical cost is not particularly “relevant” to most readers of the balance sheet“Relevance vs. Reliability” is an important issue with accountants.LiabilitiesLiabilities are listed in order of maturit

12、ylCurrent Liabilities come due in less than a year.lNoncurrent liabilities come due after a year.Companies desire more current assets than current liabilities this difference is called net working capitalEquity Equity consists of: lContributed Capital (cash raised from the issuance of shares)Earned

13、Capital (retained earnings). Retained Earnings is updated each period as follows:Market Value vs. Book ValueStockholders equity = Company book valueBook value is determined using GAAP. Book value is not the same as Market Value.Market Value = # of Shares x Price per shareOn average, US company book

14、value is roughly two-thirds of market value.Income StatementStatement of Stockholders EquityStatement of Equity is a reconciliation of the beginning and ending balances of stockholders equity accounts.Main equity categories are:lContributed capitallRetained earnings (including Other Comprehensive In

15、come or OCI)lTreasury stockStatement of Cash FlowsStatement of cash flows (SCF) reports cash inflows and outflowsCash flows are reported based on the three business activities of a company:1.Operating activities: transactions related to the operations of the business.2.Investing activities: acquisit

16、ions and divestitures of long-term assets3.Financing activities: issuances and payments toward equity, borrowings, and long-term liabilities.Articulation of Financial StatementsFinancial statements are linked within and across time they articulate.Balance sheet and income statement are linked via re

17、tained earnings.Absent of equity transactions such as stock issuances and purchases and dividend payments, the change in stockholders equity equals the income or loss for the period.In Class ExampleBaron CoburgOversight of Financial AccountingGAAPOversight of Financial AccountinglSEC oversees all pu

18、blicly traded companiesFinancial Accounting Standards Board (FASB) lGenerally Accepted Accounting Principles (GAAP)Basic Assumptions and PrinciplesMonetary UnitFiscal periodGoing concernObjectivity (Reliability)ConsistencylVersus comparabilityQuestion?Financial statements must contain objective and

19、verifiable numbers if they are to be useful. Yet, many estimates and subjective assumptions are required for the preparation of these reports. Please reconcile these apparently inconsistent statements.Exception to the Basic PrinciplesMaterialitylOnly transactions with amounts large enough to make a

20、difference are considered materiallNon-material transactions can be treated in the easiest mannerInformation Beyond Financial StatementsManagement Discussion and Analysis (MD&A)Independent Auditor ReportFinancial Statement FootnotesAudit ReportFinancial statements present fairly and in all mater

21、ial respects company financial condition. Financial statements are prepared in conformity with GAAPFinancial statements are managements responsibility. Auditor responsibility is to express an opinion on those statementsAuditing involves a sampling of transactions, not investigation of each transacti

22、onAudit opinion provides reasonable assurance that the statements are free of material misstatements Auditors review accounting policies used by management and estimates used in preparing the statementsQuestion?The SEC requires all publicly traded companies to have their financial statements audited

23、. Prior to this requirement many companies voluntarily had their statements audited. Given the cost and inconvenience, why would they do this?TakeawaysFinancial statements that are produced are the result of one possible set of rules that have resulted from a political process.Users need to be aware

24、 of these limitations.Users should read the notes to the financial statements since these contain a lot of useful guidance to interpreting the statements. Financial Statement LimitationsAssets are valued at historical cost less an estimated depreciationlOther possibilities include cost, net realizable value, replacement cost, price level adjustedNot all assets appearlHuman capital, internally ge