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University of Illinois
ACCY 202
Julie Shapland--- Universityof Illinois

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 creditors  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 intermediaries. 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 external users PROVIDERS OF FINANCIAL INFORMATION:  Profit-oriented companies  Not-for-profit entities  Households EXTERNAL USER GROUPS  Investors  Creditors  Employees  Labor unions  Customers  Suppliers  Government agencies  Financial interims CAPITAL MARKETS: provide a mechanism to help our economy allocate resources  BUSINESS ORGANIZATIONS: o Sole proprietorship o Partnership o Corporation  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 country. 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 standards. Auditors exist in order to express an opinion on the compliance of financial statements.  Eg. CPA (Certified Public Accountant) PUBLIC COMPANY ACCOUNTING REFORM  Oversight board  Corporate executive accountability  Non-audit services  Retention of work papers  Auditor rotation  Conflict of interest  Hiring of auditors  Internal controls 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  Measurement  Reporting entity  Presentation and disclosure  Framework for GAAP hierarchy  Applicability for non-profit sector  Remaining issues 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 reporting periods  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 process.  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 considered.  This is a frequently cited characteristic of financial information. ELEMENTS OF FINANCIAL STATEMENTS  Assets  Liabilities  Equity (Net Assets)  Investments by owners  Distributions to owners  Comprehensive income  Revenues  Expenses  Gains  Losses GAAP ASSUMPTIONS  Economic entity assumption  Going concern assumption  Periodicity assumption  Monetary unit assumption ECONOMIC ENTITY ASSUMPTION: all economic events can be identified with a particular economic entity.  Investors desire info
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