Chapter 1 Flashcards
Financial Accounting
Concerns the preparation and use of the accounting information provided in a company’s financial statements.
The overall objective of Financial Accounting
Is to provide a basis upon which to evaluate the financial position and performance of a company for those that have invested in the company
Managerial Accounting
First financial accounting measurement
Focuses on the production of accounting information internal to a firm for deciding such operational questions as how much inventory to produce, what price to charge and measure performance
Tax Accounting
Second financial accounting measurement
Refers to the system of measurement used by tax authorities to determine the amount of taxes to levy on a company
Four Primary Financial Statements
1) Balance Sheet
2) Income Statement
3) Statement of cash flow
4) Statement of Shareholders equity
Balance Sheet
Shows what resources the company currently has and who provided the financing to acquire the various resources
1) Assets
2) Liabilities
3) Equity
Assets
Balance Sheet
Refer to the resources of a company that are expected to provide future economic benefit
Liabilities
Balance Sheet
Represent the value of the company’s obligations to repay monies loaned to it, to pay for goods or services received by it, or to fulfill commitments made by it
Shareholders equity
Balance Sheet
The difference between a companies assets and liabilities represents the shareholders financial stake in a company
Basic Accounting Equation
Assets = Liabilities + Shareholders Equity
Accounts Receivables
Balance Sheet
Asset - The amount that the company expects to receive from its customers for prior purchases
Accounts Payables
Balance Sheet
Liabilities - The amount a company expects to pay to its suppliers for prior credit purchases of inventory
Accrual basis of accounting
This approach requires a company to record the financial effects of a business transaction even though the timing of the cash effects of the event takes place at a different time
Income Statement
Reports how much merchandise the company sold and how much profit, if any, it made from those sales
Bottom Line
Income Statement
Net Income - How much the company made or lost
Going Concern Assumption
This notion specifies that financial statements are prepared assuming that a business will continue operating in the future unless there is a substantial evidence to the contrary
Statement of cash flow
Tells us how much cash a company generated from its core business operations versus received from its shareholders and debtholders, and how much is spent to buy its long-term assets, such as software and equipment
Why are investors usually very interested in the Statement of cash flow?
Because it provides insight into a business beyond that provided by the balance sheet which reflects a company’s current financial heal, or an income statement which depicts a firms recent operating performance
Statement of shareholders equity
It reveals how the shareholders investment in a business grew by the amount o any net income retained in the business or declined as a consequence of any dividend distribution to shareholders or any loss sustained by a business
Decision Usefulness
Qualitative Attributes of Accounting Information
Decide Price of product to charge, bank credit, decision to invest in shares and at what price
Relevance
First attribute that underlies accounting information
Refers to the capacity of accounting information to influence a decision
Feedback Value
Second attribute that underlies accounting information
Pertains to decisions and actions already taken
Predictive Value
Suggests that accounting information helps financial statement users for predictions about future outcomes
Faithful Representation
Refers to the fact that accounting information is, or should be, free from error or bias
GAAP
Generally Accepted Accounting Principles - Provide guidance to companies regarding the preferred way to measure and report their performance
Footnotes
A way for companies to provide details about their accounting methods and how the various accounts are measured
Example: Inventory is primarily accounted for using the first-in, first -out method
Audit Report
Audit firms work hard to provide assurance because errors in detecting defective financial statements can result in significant lost of investors capitol
SEC
Securities Exchange Commission - Created after the Stock Market Crash during the Great Depression. Sets standards
Risk and Expected Return
Return - expected income to be earned
Riskiness - refers to the uncertainty associated with the expected return
- Risk and Return are positively correlated. Higher risk = Higher Reward
Supply of Capital
The portfolio decisions of millions of individuals and businesses in allocating funds across different investment opportunities
Go Public
Sell ownership shares i the public capital market as a means to gain access to capital to grow, to provide original investors with “liquidity” (ability to sell their ownership assets) and to have shares to be used to facilitate future mergers and acquisitions
Raise Funds
Obtain capital by issuing shares to shareholders and/or by borrowing from creditors such as financial institutions and bond investors.
Return on Investment
Derived from dividend payments and any appreciation or depreciation experienced from changes in a company’s share price
Data Analytics
Defined as the science of gatherings and analyzing raw data and then using the results to make better decisions
Big Data
A specific form of data analytics is the examination of enormous amounts of data to help the analyst uncover hidden patterns, correlations and other insights
FinTech
Any new technology that seeks to improve and automate the delivery and use of financial services
Blockchain
An evolving record of data that is managed by a multitude of different users and computers, together not owned or managed by any single entity.
Example: Bitcoin
GAAP are a set of rigid rules that if followed correctly, will lead to a correct representation of the financial performance and healthy of a firm
(Accounting Myth 1)
False - A certain amount of flexibility exists within GAAP
GAAP is created from a comprehensive analytical process, which is free from political influence
(Accounting Myth 2)
False - Politics can affect accounting
Example: Enron, Great Depression
The basic financial statements, consisting of a balance sheet, an income statement, a statement of shareholders equity and cash flow, reflect a complete, accurate and timely portrayal of the financial performance and well being of a firm
(Accounting Myth 3)
False
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
(Accounting Myth 4)
False
Each of the financial statements is independent, with each reflecting a different aspect of a firms performance and financial health
(Accounting Myth 5)
False
Cash Flow is ultimately what matters to firm and its investors
(Accounting Myth 6)
False
A knowledge of accounting is necessary only for someone who wants to be an accountant
(Accounting Myth 7)
False
Corporations
Owned by shareholders under the laws of the state or province in which a company is incorporated
Corporate Charter
Set of bylaws governing the rights and responsibilities of the board of directors to a firms shareholders and covering such topics as annual meetings, the election of directors, the type of shares to be sold and voting rights
Conflicts between managers and shareholders
Incentivize contract work to align the financial interests of managers with those of a company’s stockholders, thereby encouraging the managers to simultaneously work to maximize their own wealth as well as shareholders
Conflict between debtholders and shareholders
Shareholders re-distribute the borrowed wealth rom the debtholder’s to themselves, potentially leaving the debtholders with a worthless corporate shell and no resources to repay the loan
Fiscal Periods
Segment its operational life into reporting periods. Provides interested parties with a timely, relevant information about its various activities
10-Q
Public corporations that report to the SEC quarterly financial statements
10-k
Public corporations that report to the SEC Annual financial statements
Assets
Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events
Includes: Cash, stocks, bonds, and real estate
Liabilities
Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions
Includes: Car loans, credit card debt, student loans, mortgages
Equity
The residual interest in the assets that remain after deducting its liabilities
Revenues
Income Statement
Inflows or other enhancements of assets to an entity or settlement of its liabilities from delivering or producing goods, services or carrying out other activities that constitute the entity’s purpose
Expenses
Income Statement
Outflows or other using up of assets r incurrences of liabilities from delivering or producing goods, services or carrying out activities
Gains
Income Statement
Increases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and events affecting the entity except those that result from revenues or investments by owners
Losses
Income Statement
Decreases in equity from peripheral or incidental transactions of an entity and from all other transactions and events affecting the entity except those that result from revenues or investments by owners
Comprehensive Income
Income Statement
The change in equity of a business enterprise during a period from transactions and other events from sources other than investments by owners or distribution to owners
Investment by owners
Transfers between a business and its owners
Increase in equity of a particular business enterprise resulting from transfers to it for the purpose of increasing ownership interests
Distributions to owners
Transfers between a business and its owners
Decreases in the equity of a particular business enterprise resulting from transferring assets, rendering services or incurring liabilities to owners
Net Worth
A - L = NW
Simply the difference between what you have and what you owe
SE
Share Equity
CS
Common Stock
RE
Retained Earnings
Balance Sheet Equation
A = L + (CS + RE)
