Lecture 2: Financial Statements, Presentations and Framework

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Management and Organizational Studies
Management and Organizational Studies 3370A/B
Maria Ferraro

Financial Statements, Presentations and Framework 1. The need for shareholders to access information 2. The conceptual framework- is to guide us - There are more than 1 way to value something 3. A lot of new ways to do things - Users are used to identify the usefulness to the investors, or creditors - People want different things, but we cant compare 20 different financial statements - Is about future cash - Investors find useful: Because Im going to get money back, what I want to know is to access future cash flow, the timeflow(prefer earlier cash) and attain the risk associated with the company, the return of the safe company - Decision relevant: (stewardship is complicated) - The information is to be enhanced for the decision making of the investors 4. Relevance- the information provided should have confirmatory, predicable value. Relevant to the cashflow as up to date as possible Representational faithfulness- reflect the economic reliability of the info, being neutral is very hard Substance over from- that we look at the substance of the transaction, not the legal form of how transaction is recorded, people would manipulate legal form to avoid making bad decisions Eg A = L + e (shareholders, expense, dividend) (or cash) Lease apt Photo-5 years ( you owe 5 yrs of the lease payment) The substance of the form really says that you brought it, instead you are leasing the entire life of the asset, instead you should buy the entire asset - Decreases liability - The relevant stuff requires estimates, make sure too much liability otherwise statements are useless 5. Verifiability – very simple, want to know how much you paid for the house rd Audits-enhance liability- 3 party Understandability- make the users of the info reasonably informed -don’t create statements that an average person can read 6. Tradeoffs- give off some of the liability for some info Constraints- cant put everything on there, it’s not going to be perfect 7. Recognition and Measurement Criteria: Helping us to decide when the item will be recorded, the economic value of a transaction has changed. Where does it go? Is it an asset, or liability ? 8. Prepaid expense- asset 9. – measure the amount of revenue you earned Receivable – cash 10. Matching- go with accrual based accounting Matching principle- the basis of accounting, there is a cost and effect relationship Inventory – goes to cost of goods sold We are constantly matching, the revenue for the month is matched with the expenses 11. Accrual accounting- measurable Warranty – good example, accrual accounting, they got expenses related to that warranty, they have to make some kind of guess, the revenue this year will have some guess for the expenses for the next cuz the customer may not come back Bad debt- have to estimated too Accrual accounting- improve decision making, cuz of the measurement techniques, things are becoming a little bit more uncertain 12. Periodicity assumption- you can take all the financial info and break them into artificial time slots 13. Monetary unit assumption- if you cant record in the amount of dollar, you don’t record it at all, this works great in Canada and U.S, very stable, we have inflation, but only 2, or 3 percent, if you have 5 percent of inflation, these standards do not
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