Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,*,Accounting,Prof:Jim Wallace,TA:Golf,Overview of Week 1,Administrative stuff,What is financial accounting?,Some Myths,Accrual versus Cash-based,Financial statements,GAAP,Auditing,Administrative Stuff,Who am I,Who is your T.A.,Teaching philosophy,Syllabus,Homework,Calculator,Web Access to Class Info,What is Financial 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 providers,Financial accounting is used for both prediction and control,Accounting is rigid and yields the truth,Generally-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 statement,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 accountants,GAAP is created from a comprehensive analytical process,which is free from political influence.,It is all there,All 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 alone,Each of the financial statements is independent,with each reflecting a different aspect of the firms 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 cash as reflected on the firms statement of cash flows.,Some additional myths,Accounting is useless.,Accounting is hard!,Accountants are boring.,Other Types of Accounting,Managerial,Non-profit,Tax,Accrual Accounting,Accrual accounting rests on two guiding principles:,Revenue Recognition Principle record revenue when,Earned,Realized or Realizable,Matching Principle record expenses when,Incurred,Neither the recognition of revenue nor the recording of expense necessarily involves the receipt or payment of cash,How do you define a rich person?,Has a lot of valuable stuff(worth more than what is owed).,Makes a lot of money,The Financial Statements,The accounting equation,Balance Sheet,Income Statement,Statement of Cash Flows,Statement of Owners Equity,Statement of retained earnings,Balance Sheet,Mirrors the Accounting Equation,Assets=Liabilities+Equity,Uses of funds=Sources of funds,Assets are listed in order of liquidity,Current and non-current,Liabilities are listed in order of maturity,Equity consists of Contributed Capital and,Retained Earnings,Assets,To be reported on a balance sheet,an asset must:,Be owned or controlled by the company,Must possess expected future benefits,Most Assets are Reported at Historical Cost,Historical Cost is,Objective,Verifiable,Therefore,not subject to bias,However,historical cost is not particularly“relevant”to most readers of the balance sheet,“Relevance vs.Reliability”is an important issue with accountants.,Liabilities,Liabilities are listed in order of maturity,Current Liabilities come due in less than a year.,Noncurrent liabilities come due after a year.,Companies desire more current assets than current liabilities this difference is called net working capital,Equity,Equity consists of:,Contributed Capital(cash raised from the issuance of shares),Earned Capital(retained earnings).Retained Earnings is updated each period as follows:,Market Value vs.Book Value,Stockholders equity=Company book value,Book value is determined using GAAP.,Book value is not the same as Market Value.,Market Value=#of Shares x Price per share,On average,US company book value is roughly two-thirds of market value.,Income Statement,Statement of Stockholders Equity,Statement of Equity is a reconciliation of the beginning and ending balances of stockholders equity accounts.,Main equity categories are:,Contributed capital,Retained earnings(including Other Comprehensive Income or OCI),Treasury stock,Statement of Cash Flows,Statement of cash flows(SCF)reports cash inflows and outflows,Cash flows are reported based on the three business activities of a company:,Operating activities,:transactions related to the operations of the business.,Investing activities,:acquisitions and divestitures of long-term assets,Financing activities,:issuances and payments toward equity,borrowings,and long-term liabilities.,Articulation of Financial Statements,Financial statements are linked within and across time they,articulate,.,Balance sheet and income statement are linked via retained earnings.,Absent of equity transactions such as stock