Chapter 1 financial accounting and its economic context
Download
1 / 22

J ntanos - PowerPoint PPT Presentation


  • 418 Views
  • Uploaded on

Chapter 1: Financial Accounting and Its Economic Context Profit-seeking companies - managers prepare reports for owners of the companies. Owners and other interested parties (Users) - use reports to assess financial condition and performance of companies.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'J ntanos' - Faraday


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
Chapter 1 financial accounting and its economic context l.jpg
Chapter 1:Financial AccountingandIts Economic Context


The role of financial reporting in investment decisions l.jpg

Profit-seeking companies - managers prepare reports for owners of the companies.

Owners and other interested parties (Users) - use reports to assess financial condition and performance of companies.

User decisions - users obtain information from reports to make investment decisions.

Effects of user decisions - decisions affect the company and its managers.

The Role of Financial Reporting in Investment Decisions


Financial reporting and investment decisions l.jpg

Users assess owners of the companies.

Investment and

credit decisions

are made

Decisions affect

company and

managers

Financial Reporting and Investment Decisions

Managers prepare


Content of financial reports l.jpg

The Management Letter owners of the companies.

The Financial Statements:

Balance Sheet

Income Statement

Statement of Stockholders’ Equity

Statement of Cash Flows

The Footnotes

The Auditor’s Report

Content of Financial Reports


The management letter l.jpg

The management letter is the statement of management to the investors.

It indicates:

management is responsible for the preparation and content of the financial report.

the statements were prepared in accordance with generally accepted accounting principles (GAAP).

the company maintains a system of internal controls to safeguard assets.

The Management Letter


The financial statements l.jpg

Include a balance sheet, income statement, statement of stockholders’ equity, and a statement of cash flows (discussed in a later chapter).

The footnotes to the financials are considered an integral part of the financials, and explain many of the policies and assumptions used to prepare the financials.

The Financial Statements


The auditor s report l.jpg

The auditor’s report is a statement to the board of directors of the company and to the shareholders of the company.

It expresses an opinion as to whether the financial statements present fairly the financial activities of the company and whether the financials were prepared in accordance with GAAP

The Auditor’s Report


The economic environment of financial reporting l.jpg

Providers of capital - debt and equity investors directors of the company and to the shareholders of the company.

Reporting entities

Corporate governance

Financial information users and capital markets

Debt covenants and management compensation

Financial reporting regulations & standards

the accounting policymaking process

Sarbanes-Oxley Act

Legal liability

Professional reputation and ethics

The Economic Environment of Financial Reporting


Providers of capital l.jpg

Provide capital directors of the company and to the shareholders of the company.

equity capital through stock investments

debt capital through bond and loan investments (creditors)

Receive returns

equity investors receive dividends

creditors and bond investors receive interest

Stock investors choose board of directors

Board of directors

Select corporate officers (management)

Set company policy

Select audit committee

Management – runs the company

Providers of Capital


Reporting entities l.jpg

Reporting entities are called companies, businesses and firms.

The companies may be further divided into segments and subsidiaries, which may provide their own financials.

Consolidated financials are prepared when subsidiaries are combined with the parent’s financials.

Reporting Entities


Corporate governance financial information users l.jpg

Financial statements used by a variety of groups. firms.

Equity investors: purchase shares of stock, which represent ownership in the company. The financials are used by investors to analyze management’s decisions.

Debt investors (creditors): provide capital through loans. The financials are used by creditors to assess likelihood of default.

Management: uses other companies financials to asses the competition.

Others, including government bodies, labor unions, employees, use financials to assess the financial status of the company.

Corporate GovernanceFinancial Information Users


Corporate governance and capital markets l.jpg

Capital markets value the publicly traded equity and debt securities.

The financials are a component of the information that the markets use to value companies securities, along with a number of nonfinancial measures.

The market reacts to financial and other information as it is released by management.

Corporate Governanceand Capital Markets


Debt covenants and management compensation contracts l.jpg

Debt covenants are part of debt contracts between the company and creditors. Violation of debt covenants may lead to more costly debt terms.

Management compensation contracts often base pay on certain income or stock price goals.

Such goals are designed to encourage certain management behavior.

Debt Covenants and Management Compensation Contracts


Regulations and standards l.jpg

The Securities and Exchange Commission (SEC) governs financial reporting for publicly traded companies. Congress and other regulatory agencies have influence with the SEC.

The Financial Accounting Standards Board (FASB) is responsible for the promulgation of generally accepted accounting principles (GAAP) for financial statements. The FASB accepts input from all interested parties, including accountants, corporations, academics, and governmental entities.

Regulations and Standards


The accounting policymaking process l.jpg

Policymakers financial reporting for publicly traded companies. Congress and other regulatory agencies have influence with the SEC.

SEC

FASB

Public Input

Congress, White House, government agencies

Public hearings, letters

Generally Accepted Accounting Principles

(GAAP)

Perceived economic consequences

Actual Accounting Practices

Economic Consequences

The Accounting Policymaking Process


Sarbanes oxley act l.jpg

Passed by Congress in 2002, in response to a series of corporate scandals.

Requires principal executive and financial officers to certify a number of statements regarding the financials.

Places additional responsibilities on management to ensure that adequate internal controls are in place.

Sarbanes-Oxley Act


Legal liability l.jpg

Management is legally responsible to the stockholders to act in their interest.

Auditors are legally responsible to the stockholders to conduct a thorough and independent audit.

If management or auditors fail in their duties, investors and others may sue to recover any losses that might occur as a result the failure.

Many recent examples of management and audit failure exist: Enron, WorldCom, HealthSouth, Xerox, Rite Aid, and Quest.

Legal Liability


Professional reputation and ethics l.jpg

Ethical behavior is in the long-run interest of managers, stockholders, and auditors.

Many companies,universities, and professional organizations have enacted increased emphasis on ethics.

Auditors’ reputations are integral to their ability to perform their duties. High ethical conduct is imperative to their continued success.

Professional Reputation and Ethics


The four kinds of accounting figure 1a 1 l.jpg

Economic Entity stockholders, and auditors.

Managers

System

Financial Information

Recipients

Decisions

The Four Kinds of Accounting (Figure 1A-1)

Financial Accounting

Profit-making companies

Finance or accounting department

GAAP

  • Income statement

  • Balance sheet

  • Statement of stock-

  • holders’

  • equity

  • Statement of cash flows

  • Other disclosures

  • Auditor report

  • External

  • Investors

  • Creditors

  • Suppliers

  • Employees

  • Managers

  • Government

  • General public

  • Equity and debt investments

  • Contract negotiations

  • Regulation

  • Dividend payments


The four kinds of accounting figure 1a 120 l.jpg

Economic Entity stockholders, and auditors.

Managers

System

Financial Information

Recipients

Decisions

The Four Kinds of Accounting (Figure 1A-1)

Managerial Accounting

All entities

Finance or accounting department

GAAP

  • Manager

  • reports

  • Production

  • costs

  • Performance

  • evaluation,

  • etc.

  • Internal

  • Managers

  • Operating

  • decisions


The four kinds of accounting figure 1a 121 l.jpg

Economic Entity stockholders, and auditors.

Managers

System

Financial Information

Recipients

Decisions

The Four Kinds of Accounting (Figure 1A-1)

Not-for-profit Accounting

Nonprofit

entities

Finance or accounting department

Fund accounting principles

  • Balance sheet

  • Funds flow

  • statements

  • External

  • Creditors

  • Government

  • General public

  • Debt investments

  • Budget allocations


The four kinds of accounting figure 1a 122 l.jpg

Economic Entity stockholders, and auditors.

Managers

System

Financial Information

Recipients

Decisions

The Four Kinds of Accounting (Figure 1A-1)

Tax Accounting

All entities

Finance or accounting department

Internal revenue code

  • Official tax forms:

  • 1040 for individuals

  • 1120 for corporations

  • External

  • Internal Revenue Service

  • Collection of government revenues


ad