1 Intro to financial accounting Flashcards
What is accounting?
Accounting is the process of identifying, measuring,recording and communicating economic information to assist users to make informed economic decisions.
Why do we need accounting?
Information asymmetry between investors and managers
Agency problems : when the manager view the problems differently with the shareholders. Manages will use their knowledge to maximise their own wealth rather than the shareholders’ wealth
use to mitigate information asymmetry
Who are the users of accounting information ?
Outsiders: Investors, Banks, Regulators, Suppliers & Customers ✓ Shareholders in buy/sell decisions ✓ Bankers and creditors in lending decisions • Insiders: Managers, Boards ✓ Boards in rewarding and removing executives ✓ Management in planning for next year
Balance Sheet
Shows the financial position ( the entity’s financial resources and obligations) of an enterprise at a particular point of time — What are the entity’s resources and how were they financed?
Assets= liabilities+ equity ( net assets )
Income Statement
Financial performance (generating new resources/ revenues) of an enterprise over a period of time
Two elements:
Revenue: inflows of economic benefits
Expenses: loss of economic benefits
Revenue- Expense= Profit/ Loss (Net Income)
Accrual Accounting— when revenues & expenses are recognised when an economically meaningful event has occurred
Qualitative Characteristics of Accounting
Fundamental— relevance (impact the decision-making), faithful representation(reliability, complete, unbiased, free from error)
Enhancing: Comparability, Verifiability, Timeliness, Understandability
Accrual Accounting
Accrual accounting includes the impact of transactions on the financial statements in the time periods where revenues and expenses occur rather than when the cash is received or paid. (recognise cash + credit card payment)
Accounting Entities
The entity for which financial statements are prepared
Activities of the entity are separate from those of its owners/members
legal & economic entities: companies, partnerships, funds, associations, public sector bodies.
Accounting Period
Life of business is divided into discrete time periods of equal length to determine financial performance and position. —-e.g. Annually
Monetary
Universally accepted medium of exchange ($).
Measure economic activity by a common denominator.
Only report events/recourses that can be reliably measured by $.
Historical Cost
Transactions are initially recorded at their original cost.
The original cost at the time of purchase rather than the price of resale
Going Concern
Assumes continued operation of accounting entity into foreseeable future
There is no intention or need to liquidate
Produces demand for financial information during life of entity
