Chapter 2 lecture Flashcards
summarizing economic transactions in a way to creates useful information
accounting
4 types of accounting
- financial
- management
- audit
- tax
- external users (investors + creditors)
- transactions are for a business, generally a corporation
financial accounting
what is the objective of financial reporting
- try to provide information to investors and creditors to make resource allocation decisions
the process of determining the economic value of an asset, business, investment, or liability
valuation role
the resposible management and ethical oversight of resources to ensure their effective use, sustainability, and preservation for future stakeholders
stewardship
- government agencies
SEC, IRS - competitors
- auditors
- suppliers
- unions/employees
other external users of financial reporting
- long term considerations (like IP)
- dividends plans- when will I get my money
- how many shares/how much of the business do I own
- control/voting rights
what additional information you would want to know you are investing in a business
2 fundamental characteristics
- relevance
- faithful representation
2 types of materiality
- quantitative
- qualitative
big in size and dollar value
quantitative
matter by nature
qualitative
all necessary is depicted
completeness
without bias in the presentation
neutrality
financial information presented in a companys statements is accurate and contains no mistake or omissions
free form error
costs to report information are justified by the benefits of reporting that information
cost constraint
4 financial reporting assumptions
- economic entity
- going concern
- monetary unit
- periodicity
entities are separate from their owners
economic entity
the firm is expected to continue operating/ not go bankrupt
going concern
time is cut into reportable units
periodicity
4 accounting principles
- revenue recognition
- expense recognition
- measurement principle
- full disclosure
method of calculating a businesses assets and liabilities based on their current market value
fair value
fair value is related to relevance bc
capable of making a difference
historical cost is related to faithful representation
less measurement uncertainty
financial statements must include all relevant information needed to make informed investment and credit decisions
full disclosure
notes that are provided with another item, such as a sound recording or a document
accompanying notes
additional documents that provide information about an organizations financial health
supplementary schedules
financial accounting =
debits and credits
financial recording =
includes financial accounting but also things that dont fit in debits and credits
the average length of the annual report of an FTSE 350 firm is how many pages
186 pages
