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Financial Accounting. ACCT 201. 1. Definition . Accounting is the process of identifying, measuring, recording and communicating information about a company to users for making economic decisions. 2. Role of Accounting in Society. Shareholders Creditors . Corporations. Need capital.
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Financial Accounting ACCT 201
1. Definition • Accounting is the process of identifying, measuring, recording and communicating information about a company to users for making economic decisions
2. Role of Accounting in Society Shareholders Creditors Corporations Need capital Company’s private accountants prepare financial statements Independent CPAs • Make economic decisions based on financial statements provided by companies GAAP Need information Public accountants Accounting related employment Private accountants
The role of accounting (continued) • Provide information about a company for making economic decisions • Investors • Creditors • Customers and suppliers • Regulators and unions • Safeguard company’s assets • Fulfill stewardship responsibilities • Most importantly, we keep the score for American businesses
3. Generally Accepted Accounting Principles (GAAP) • Guidelines issued by authoritative bodies for processing accounting information • The primary objective of this course to study GAAP in the U.S. • Each country has its own GAAP
4. Accounting Standard Setting in the U.S. • SEC (Securities Exchange Commission) • Regulate all public companies • Has the legal authority to set accounting standards, but historically has delegated the standard-setting responsibility to the private sector • FASB (Financial Accounting Standard Board) • Has been responsible for setting accounting standards in the U.S. since 1973 • Issues standards and interpretations, and concepts • AICPA (American Institute of Certified Public Accountants) • The professional organization of the CPAs in the U.S. • Administers CPA exams • Sets auditing standards
5. Financial statements (F/S) • F/S is the means by which accountants communicate information about a company to users • Four basic F/S: • Income statement: presents information about the operating performance of a company during a period of time • Statement of shareholder’s equity: Explain the change in shareholders’ equity during a period of time • Balance sheet: presents company’s financial position as of the end of the year • Statement of cash flows: explains where the cash comes from and what the cash was used for
Balance Sheet As of Dec. 31, 2005 AssetsLiabilities and Shareholders’ Equity Cash $ 7,730,000 Accounts payable (due 2006) $10,000,000 Accounts receivable 8,500,000 Notes payable (due 2008) 50,000,000$60,000,000 Inventories 10,000,000 Capital Stock 40,000,000 Plant Asset 80,000,000 Retained earnings 6,230,000$46,230,000 Total assets $106,230,000 Total L and shareholders’ equity $106,230,000 Statement of Shareholders’ Equity For the year ended Dec. 31, 2005 Capital Stock: Beginning CS $40,000,000 Add: new stock issued 0 Less: stocks retired/reacquired 0 Ending Capital Stock $40,000,000 Retained Earnings: Beginning retained earnings $ 5,500,000 Add: net income 11,630,000 Less: dividends 9,900,000 Ending retained earnings $ 6,230,000 Total shareholders’ equity $46,230,000 Green Bay Corporation Income Statement For the year ended Dec. 31, 2005 Revenues: Fishing revenue $21,300,000 Passenger service revenue 12,560,000 $33,860,000 Expenses: Rent expense 4,000,000 Salaries and wages, taxes 18,230,000 22,230,000 Net Income $11,630,000
4. Evaluating Green Bay Corporation’s performance and financial condition • Operating performance: • Return on shareholders’ equity (ROE) • Liquidity: ability to pay short-term obligations • Current ratio • Solvency: ability to pay all the debts • Total Liability to total assets ratio
