ACCOUNTING 202 WEEK 1 READING NOTES 9/3/2013 11:35:00 PM
Investors and creditors use information to assess risk and return
FINANCIAL ACCOUNTING: focuses on the information needs of investors and
Profit-oriented companies use financial accounting to manage their
present and potential investors.
FINANCIAL INTERMEDIARY: financial analysts, stockbrokers, mutual fund
managers, and credit rating organizations are all considered financial
MANAGERIAL ACCOUNTING: deals with the concepts and methods used to
provide information to an organization’s internal users and managers
Financial statements convey financial information to external users.
o Ex. Balance sheet, income statement, statement of cash
flows, statement of equity
FINANCIAL REPORTING: the process of providing financial information to
PROVIDERS OF FINANCIAL INFORMATION:
EXTERNAL USER GROUPS
Financial interims CAPITAL MARKETS: provide a mechanism to help our economy allocate
o Sole proprietorship
Corporations are the dominant business organizations
CORPORATIONS: acquire capital from investors in exchange for ownership
and interest from creditors by borrowing
Eg. Stocks, bonds
SECONDARY MARKET TRANSACTIONS: provide for the transfer of stocks and
bonds among individuals and institutions
NO CASH IS RECEIVED FROM SECONDARY TRANSACTIONS
Investors and creditors are both interested in earning a fair return
on the resources provided.
RATE OF RETURN:
Dividends + Shared price appreciation / initial investment
Variables to consider:
o Expected rate of return
o Uncertainty risk
In he long run, a company will be able to provide investors with a
return ONLY if they can generate a profit.
FINANCIAL ACCOUNTING: the objective is to provide investors and creditors
with useful information for decision making
Many US and foreign companies operate and raise capital in more than one
IASB: “International Accounting Standards Board”, dedicated to developing
a single set of global accounting standards. IFRS: standards that are reused by the IASB, they influence GAAP
Auditors exist in order to express an opinion on the compliance of financial
Eg. CPA (Certified Public Accountant)
PUBLIC COMPANY ACCOUNTING REFORM
Corporate executive accountability
Retention of work papers
Conflict of interest
Hiring of auditors
The conceptual framework does not prescribe GAAP, and provides an
underlying foundation for accounting standards.
JOINT CONCEPTUAL FRAMEWORK:
Objective and qualitative characteristics
Elements and recognition
Presentation and disclosure
Framework for GAAP hierarchy
Applicability for non-profit sector
Discussions of the objective and qualitative characteristics of financial
reporting information are based on the completed first phase of the joint
FASB and IASB project.
For financial information to be useful, it should possess the fundamental
decision-specific qualities of relevance and faithful representation. Relevance in the context of financial reporting means that the information
must possess predictive value and or confirmatory value.
The predictive ability is the ability of reported earnings to predict a
company’s future earnings.
Faithful representation exists when there is agreement between a measure
or description and the phenomenon it purports to represent.
Faithful representation requires that the information be complete,
neutral, and free from material error.
Information should be free from material error if it is to be useful.
Enhancing qualitative characteristics include comparability, verifiability,
timeliness, and understandability.
COMPARABILITY: helps users see similarities and differences
between events and conditions
CONSISTENCY: permits valid comparisons among different
VERIFIABILITY: implies a consensus among different measurers.
TIMELINESS: important for information to be decision useful,
allows users enough time to use the information in their decision
UNDERSTANDABILITY: users must understand the information
within the context of the decision being made
Cost effectiveness constrains many of the financial decisions we make.
Materiality is also another pervasive constraint, as information has a
material effect on decisions
Conservatism is a practice followed in an attempt to ensure that
uncertainties and risks inherent in business situations are adequately
This is a frequently cited characteristic of financial information.
ELEMENTS OF FINANCIAL STATEMENTS Assets
Equity (Net Assets)
Investments by owners
Distributions to owners
Economic entity assumption
Going concern assumption
Monetary unit assumption
ECONOMIC ENTITY ASSUMPTION: all economic events can be identified with
a particular economic entity.
Investors desire info