Slide 1:Accounting Principles


Slide 2:Accounting Principles Monetary unit Economic entity Time period Going concern The Conceptual Framework of Accounting Assumptions Principles Constraints in Accounting Statement Presentation and Analysis Objectives of reporting Qualitative characteristics Elements of financial statements Operating guidelines Revenue recognition Matching Full disclosure Cost Materiality Conservatism Summary of conceptual framework Classified balance sheet Classified income statement Analyzing financial statements An international perspective


The Conceptual Framework of Accounting :Various users need financial information The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced. Financial Statements Balance Sheet Income Statement Statement of Retained Earnings Statement of Cash Flows Note Disclosure Generally Accepted Accounting Principles (GAAP) The Conceptual Framework of Accounting SO 1 Explain the meaning of GAAP and identify the key items of the conceptual framework.


The Conceptual Framework of Accounting :Securities and Exchange Commission (SEC) http://www.fasb.org/ http://www.sec.gov/ The Conceptual Framework of Accounting Organizations Involved in Standard Setting: Financial Accounting Standards Board (FASB) SO 1 Explain the meaning of GAAP and identify the key items of the conceptual framework.


The Conceptual Framework of Accounting :Conceptual Framework - “…a constitution, a coherent system of interrelated objectives and fundamentals.” FASB’s conceptual framework consists of the following: Objectives of financial reporting (??????). Qualitative characteristics of accounting information (??????????). Elements of financial statements (???????). Operating guidelines (assumptions, principles, and constraints) (????). The Conceptual Framework of Accounting SO 1 Explain the meaning of GAAP and identify the key items of the conceptual framework.


Conceptual Framework :To provide information that is useful to those making investment and credit decisions (??????????). Helpful in assessing future cash flows (???????????). Identify the economic resources (assets), the claims to those resources (liabilities), and the changes in those resources and claims (?????????(??),???????(??),????). Conceptual Framework Objectives of Financial Reporting SO 2 Describe the basic objectives of financial reporting.


Conceptual Framework :According to the FASB conceptual framework, the objectives of financial reporting for business enterprises are based on? Generally accepted accounting principles Reporting on management’s stewardship. The need for conservatism. The needs of the users of the information. Conceptual Framework (CPA adapted) Review: SO 2 Describe the basic objectives of financial reporting.


Conceptual Framework :Relevance (???) – making a difference in a decision. Predictive value (????) Feedback value (????) Timeliness (???) Reliability (???) –???????????? Verifiable (????) Representational faithfulness (????) Neutral - free of error and bias (???) Qualitative Characteristics Conceptual Framework SO 3 Discuss the qualitative characteristics of accounting information and elements of financial statements.


Conceptual Framework :Comparability (????) – Information that is measured and reported in a similar manner for different companies is considered comparable. Consistency (???) - When a company applies the same accounting treatment to similar events from period to period. Qualitative Characteristics Conceptual Framework SO 3 Discuss the qualitative characteristics of accounting information and elements of financial statements.


Conceptual Framework :Review: Relevance and reliability are the two primary qualities that make accounting information useful for decision making. To be reliable, accounting information must be capable of making a difference in a decision. Conceptual Framework SO 3 Discuss the qualitative characteristics of accounting information and elements of financial statements. True False True True False False


Conceptual Framework :Revenue Expenses Gains Losses Assets Liabilities Equity “Moment in Time” “Period of Time” Elements of Financial Statements Conceptual Framework SO 3 Discuss the qualitative characteristics of accounting information and elements of financial statements.


Conceptual Framework :Operating Guidelines Conceptual Framework


Assumptions :Assumptions provide a foundation for the accounting process. Monetary Unit (??????) Economic Entity (??????) Periodicity (??????) Going Concern (??????) SO 4 Identify the basic assumptions used by accountants. Assumptions


Assumptions :Only transaction data capable of being expressed in terms of money should be included in the accounting records of the economic entity. SO 4 Identify the basic assumptions used by accountants. Assumptions Monetary Unit


Assumptions :Economic events can be identified with a particular unit of accountability. SO 4 Identify the basic assumptions used by accountants. Assumptions Economic Entity


Assumptions :SO 4 Identify the basic assumptions used by accountants. Assumptions Time Period The economic life of a business can be divided into artificial time periods.


Assumptions :SO 4 Identify the basic assumptions used by accountants. Assumptions Going Concern The enterprise will continue in operation long enough to carry out its existing objectives.


Assumptions :Illustration: Identify which basic assumption of accounting is best described in each item below. The economic activities of FedEx Corporation are divided into 12-month periods for the purpose of issuing annual reports. (b) Solectron Corporation, Inc. does not adjust amounts in its financial statements for the effects of inflation. (c) Walgreen Co. reports current and noncurrent classifications in its balance sheet. (d) The economic activities of General Electric and its subsidiaries are merged for accounting and reporting purposes. Periodicity Going Concern Monetary Unit Economic Entity Assumptions SO 4 Identify the basic assumptions used by accountants.


Principles :Accounting principles dictate how economic events should be recorded and reported. Revenue Recognition (??????) Matching (Expense Recognition) Full Disclosure (??????) Cost (????) SO 5 Identify the basic principles of accounting. Principles


Principles :Revenue Recognition - companies should recognize revenue in the accounting period in which it is earned. SO 5 Identify the basic principles of accounting. Principles


Principles :Matching - efforts (expenses) should be matched with accomplishment (revenues) whenever it is reasonable and practicable to do so. “Let the expense follow the revenues.” Illustration 7-4 Expense Recognition SO 5 Identify the basic principles of accounting. Principles


Principles :Illustration 7-5 Basic Principles Matching Principle SO 5 Identify the basic principles of accounting. Principles


Principles :Full Disclosure – Provided through financial statements, notes to the financial statements, and supplementary information. SO 5 Identify the basic principles of accounting. Principles Illustration 7-5 Basic Principles


Principles :Cost Principle – the price, established by the exchange transaction, is the “cost”. SO 5 Identify the basic principles of accounting. Principles Illustration 7-5 Basic Principles


Principles :Illustration: Identify which basic principle of accounting is best described in each item below. (a) Norfolk Southern Corporation reports revenue in its income statement when it is earned instead of when the cash is collected. (b) Yahoo, Inc. recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue. (c) Oracle Corporation reports information about pending lawsuits in the notes to its financial statements. (d) Eastman Kodak Company reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair market value is greater. Revenue Recognition Matching Full Disclosure Cost SO 5 Identify the basic principles of accounting. Principles


Constraints in Accounting :Constraints permit a company to modify generally accepted accounting principles without reducing the usefulness of the reported information. Materiality (???) Conservatism (????) Constraints in Accounting SO 6 Identify the two constraints in accounting.


Constraints in Accounting :Materiality - an item is material if its inclusion or omission would influence or change the judgment of a reasonable person. Illustration 7-6 Constraints Constraints in Accounting SO 6 Identify the two constraints in accounting.


Constraints in Accounting :Conservatism - When in doubt, choose the method that will be least likely to overstate assets and income. Illustration 7-6 Constraints Constraints in Accounting SO 6 Identify the two constraints in accounting.


Constraints in Accounting :Illustration What accounting constraints are illustrated by the items below? (a) Crimson Tide Corporation does not accrue a contingent lawsuit gain of $650,000. (b) Sun Devil Corporation expenses the cost of wastebaskets in the year they are acquired. Conservatism Materiality Constraints in Accounting SO 6 Identify the two constraints in accounting.


Summary of Conceptual Framework :Summary of Conceptual Framework


Statement Presentation and Analysis :Classified Balance Sheet Statement Presentation and Analysis SO 7 Understand and analyze classified financial statements. Illustration 7-8 Standard classification


Statement Presentation and Analysis :Classified Balance Sheet Statement Presentation and Analysis SO 7 Understand and analyze classified financial statements. Illustration 7-9 Proprietorship balance sheet A proprietorship, the balance sheet uses the term “Owner’s equity” instead of “Stockholders’ equity”


Statement Presentation and Analysis :Classified Balance Sheet Statement Presentation and Analysis SO 7 Understand and analyze classified financial statements. Illustration 7-10 Partnership balance sheet In a partnership, each partner has a separate capital account.


Statement Presentation and Analysis :Classified Income Statement Statement Presentation and Analysis SO 7 Understand and analyze classified financial statements. A multiple-step income statement generally includes the following. Sales revenue Cost of goods Operating Other revenues and gains Other expenses and losses Two additional items are income tax expense and earnings per share.


Statement Presentation and Analysis :Classified Income Statement Statement Presentation and Analysis SO 7 Understand and analyze classified financial statements. Illustration 7-11 Income taxes


Slide 36:Classified Income Statement Net Income Earnings Per Share = Number of Common Shares Outstanding Statement Presentation and Analysis Indicates the net income earned by each share of outstanding common stock. SO 7 Understand and analyze classified financial statements.


Statement Presentation and Analysis :Analyzing Financial Statements Statement Presentation and Analysis SO 7 Understand and analyze classified financial statements. Three major characteristics are generally used: Liquidity, Profitability, and Solvency.


Statement Presentation and Analysis :Liquidity Statement Presentation and Analysis SO 7 Understand and analyze classified financial statements. This ratio means that current assets are more than two times greater than current liabilities.


Statement Presentation and Analysis :Statement Presentation and Analysis SO 7 Understand and analyze classified financial statements. Working capital provides some indication of the company’s ability to meet its existing current obligations. Liquidity


Statement Presentation and Analysis :Statement Presentation and Analysis SO 7 Understand and analyze classified financial statements. Profitability


Statement Presentation and Analysis :Statement Presentation and Analysis SO 7 Understand and analyze classified financial statements. Profit Margin Percentage measures the percentage of each dollar of sales that results in net income. Profitability Profitability ratios measure the income or operating success of a company for a given period of time.


Statement Presentation and Analysis :Statement Presentation and Analysis SO 7 Understand and analyze classified financial statements. Return on Assets is an overall measure of profitability. Profitability Return on Common Equity shows the percentage of net income earned for each dollar of owners’ investment.


Statement Presentation and Analysis :Statement Presentation and Analysis SO 7 Understand and analyze classified financial statements. Debt to Total Assets measures the percentage of total assets that creditors, as opposed to stockholders, provide. Solvency Solvency measures the ability of an enterprise to survive over a long period of time.