Summary Everything you need to pass Accounting

Accounting



Introduction


 Types of economic units:
o Public budget
o Private person
o Enterprise
 Company
 Public authorities and administration
 Company
o A company is deemed to exist if a legal or natural person is entrepreneurially
planning and operating
o Industrial / service / disposal companies
 Purpose of accounting
o Provide useful information for making good decisions and ultimately increase
social welfare
 Information about the (ex-ante) prospect of a company
 Basis for financing of entrepreneurs (valuation role)
 Information about the (ex-post) performance of a company
 Basis for managing companies and holding managers
accountable (stewardship role)
 Information for contracts of companies/managers with others
 Basis for contracts (contracting role)
 Targets
o Performance
 Offer of certain services
o Safety
 Risk reduction
o Success
 Profit maximization
 Increase in market share
 Process of accounting
o Business transactions are recorded according to rules and aggregated
information are disseminated to the public

, Economic Activity




 Order-to-cash

, Consequences of accounting
o (Expected) accounting-based decisions have feedback loops to judgment
o Earnings management
 Intentionally influencing the process of financial reporting to obtain
some private gain
 Mislead stakeholders
 Not illegal within the GAAP
 Incentives for doing earnings management
 Performance-based compensation
o E.g., bonus payment
 Raising capital
o IPOs, SEOs
 Meet/beat targets
o Increase firm valuation and managerial target
 Avoid debt covenant violations
 Quiet life
o Smooth accounting performance is less burdensome
to explain
 Counter measures:
 Supervisory board and audit committee
 Financial Auditors
 Enforcement bodies
 Other corporate governance mechanisms
 Business Accounting

, Terms of Accounting




 Cash-outflow:
o Cash and cash equivalents that are spent by the company within a period.
Every cash-outflow decreases the amount of cash on hand and cash in banks
 Cash-inflow:
o Cash and cash equivalents that flow directly to the company within a period.
Every cash-inflow increases the amount of cash on hand and cash in banks
 Expenditure:
o Monetary value of a company’s acquired economic good within a period.
Regardless whether the cash-outflows are made in the previous or following
years
 Receipts:
o Monetary value of a company’s delivered economic goods within a period.
Regardless whether the cash-inflows are made in the previous or following
years
 Expense:
o Expenditures periodised and net income affecting. The period expense equals
the amount of all consumed respectively used economic goods within that
period
 Income:
o Receipts periodized and net income affecting. The period income equals the
amount of realized increase in value within that period
 Cost:
o Monetarily assessed consumption of goods and services due to providing
goods and services