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Lecture 2

ECON 4 Lecture 2: Jan 10 2019Premium

5 pages21 viewsWinter 2019

Department
Economics
Course Code
ECON 4
Professor
Steven Levkoff
Lecture
2

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Reporting and Regulations in Financial Accounting
The Rule Makers
Generally Accepted Accounting Principles (GAAP)
Set by the general accounting standards board in the US
Just in the US
Established by the US Congress
Delegated to the SEC (Securities and Exchange Commision)
Delegated to the Financial Accounting Standards Board (FASB)
When rules need to be change, it is again delegated to the
Emerging Issues Task Force (EITF) or the American Institute of
CPAs (AICPA)
A lot of time, the rules converge with the IFRS
International Financial Reporting Standards (IFRS)
Set up by the international accounting standards boards
Deals with exchange rates, foreign currency, translations, etc.
Established by the International Accounting Standards Board (IASB)
Required in over 100 countries (closer to 200)
Not applicable to US firms filing in the US
The overlap is large enough with GAAP that for a beginner course, there
doesn’t have to be much differentiation
Internal Reporting
Management is responsible for preparing financial statements
With oversight from the Audit Committee of the Board of Directors (BoD)
Middle and lower level managers pass it up to the C/E/F/OO who then
pass it to the BoD
Independent auditors are hired by the BoD to provide a formal “expressed
opinion” regarding the financial statements’ conformity by GAAP
General corporate structure
Board of Directors
Make sure that business is done in the best interest of investors
CEO, CFO, COO
Middle/lower level management
External Enforcement and Oversight
The SEC (as well as other regulators) can take legal action should any GAAP
non conformities or other violations come to light
Information intermediaries may help expose firms with questionable accounting
Information intermediaries are private, NGOs that act as regulators
Media coverage
Stock analyst reports
Institutional investors fleeing
General public oversight
Financial Statements -- the Balance Sheet
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Required financial statements
Balance sheet
Financial position at a particular point in time
Good, but they don’t tell you how a company has changed over time (you
would need more than one to do that)
The only financial statement for this course that provides a static image of
the firm
Income statement
Results of operating over a period of time
Shows how the firm has changed over a period of time
Usually the first one that is prepared
Statement of cash flows
When you make income and when you receive cash for that income are
not necessarily the same, which is why you need this and an income
statement
Sources and uses of cash over a period of time
Usually done last
Statement of Stockholder’s Equity
Changes in the stockholders equity over time
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Example: Bill’s Internet Security Services
**Context matters! Just because one asset goes up or down, doesn’t mean it’s a good or a bad
thing, it depends on who you are and what else is happening
On Dec 1 2017
Receives $50,000 cash from issuing common stock
Borrows $80,000 from the bank and buys $100,000 worth of hardware
Will be used for 48 months, with a $4,000 salvage value
Means that if we wanted to do this evenly, we use $2,000 of the
hardware’s value every month
Pays $12,000 cash upfront to rent office space for 1 year
About $1,000 a month upfront
During December (let’s say after the 2nd)
Performs services for 2 clients each for one-time service deals. The clients will
pay $40,000 (in total) within the next 30 days for services rendered
He also got employees, pays employees $10,000 in wages
December 31st 2017: Bank wants to see financial statements
The big question is: did Bill “make money” during December?
Cash Flows (summary)
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