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Terms in this set (222)
What is Accounting?
Accounting is the language of business; it is a standard set of rules for
measuring a company's financial performance.
Assessing a company's financial performance is important for:
The firm's officers (managers and employees)
Investors
Lenders
General public
Standard financial statements serve as a "yardstick" of communicating financial
performance to the general public.
,Why is Accounting Important?
Enables managers to make corporate decisions
Enables the general public to make investment decisions
Who Uses Accounting?
Used by a variety of organizations - from the federal government to non-profit
organizations to small businesses to corporations
We will discuss accounting rules as they pertain to publicly-traded companies
Accounting Regulations
Accounting attempts to standardize financial information and follows rules and
regulations
These rules are called Generally Accepted Accounting Principles (GAAP)
In the US, the Securities and Exchange Commision (SEC) authorizes the
Financial Accounting Standards Board (FASB) to determine accounting rules
GAAP comes from the Statements of Financial Accounting Standards (SFAS)
issued by the FASB
An Overview of the SEC
A US federal agency established by the US Congress in 1934
Primary mission is "to protect investors and maintain the integrity of the
securities markets"
Division of Corporate Finance oversees FASB
An Overview of FASB
Established in 1973 as an independent body to carry out the function of
codifying accounting standards on the behalf of the SEC
Composed of seven full-time members appointed for five years by the Financial
Account Foundation (FAF)
Decisions are influenced by:
International Financial Reporting Standards (IFRS)
Over 100 countries, including the EU, UK, Canada, Australia, and Russia, have
adopted a unified set of international accounting standards (IFRS)
Although we have seen unprecedented convergence over the last few years
between US GAAP and IFRS, some differences remain
, Assumption 1: Accounting Entity
A company is considered a separate "living" enterprise, apart from its owners
In other words, a corporation is a "fictional" being
Assumption 2: Going Concern
A company is considered a "going concern" for the foreseeable future; it is
assumed to remain in existence indefinitely
Assumption 3: Measurement
Financial statements can only show measurable activities of a corporation such
as its quantifiable resources, its liability, amount of taxes it is facing, etc.
Assumption 4: Periodicity
Companies are required to file annual and interim reports
In the US, quarterly and annual financial reports are required
An accounting year (fiscal year) is frequently aligned with the calendar year
Four Underlying Assumptions of Accounting
(1) Accounting Entity
(2) Going Concern
(3) Measurement
(4) Periodicity
Principle 1: Historical Cost
Financial statements report companies' resources at an initial historical cost
Why?
Represents the easiest measurement method without a need for appraisal and
revaluation
Marking resources up to fair value allows for management discretion and
subjectivity, which US GAAP attempts to minimize by using historical cost
Note: IFRS allows you to write up the asset to fair value, but most companies
use historical value anyways
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A
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C
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a
s
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C
o
u
r
,s
e
Save
Students
also
studied
Terms in this set (222)
What is Accounting?
Accounting is the language of business; it is a standard set of rules for
measuring a company's financial performance.
Assessing a company's financial performance is important for:
The firm's officers (managers and employees)
Investors
Lenders
General public
Standard financial statements serve as a "yardstick" of communicating financial
performance to the general public.
,Why is Accounting Important?
Enables managers to make corporate decisions
Enables the general public to make investment decisions
Who Uses Accounting?
Used by a variety of organizations - from the federal government to non-profit
organizations to small businesses to corporations
We will discuss accounting rules as they pertain to publicly-traded companies
Accounting Regulations
Accounting attempts to standardize financial information and follows rules and
regulations
These rules are called Generally Accepted Accounting Principles (GAAP)
In the US, the Securities and Exchange Commision (SEC) authorizes the
Financial Accounting Standards Board (FASB) to determine accounting rules
GAAP comes from the Statements of Financial Accounting Standards (SFAS)
issued by the FASB
An Overview of the SEC
A US federal agency established by the US Congress in 1934
Primary mission is "to protect investors and maintain the integrity of the
securities markets"
Division of Corporate Finance oversees FASB
An Overview of FASB
Established in 1973 as an independent body to carry out the function of
codifying accounting standards on the behalf of the SEC
Composed of seven full-time members appointed for five years by the Financial
Account Foundation (FAF)
Decisions are influenced by:
International Financial Reporting Standards (IFRS)
Over 100 countries, including the EU, UK, Canada, Australia, and Russia, have
adopted a unified set of international accounting standards (IFRS)
Although we have seen unprecedented convergence over the last few years
between US GAAP and IFRS, some differences remain
, Assumption 1: Accounting Entity
A company is considered a separate "living" enterprise, apart from its owners
In other words, a corporation is a "fictional" being
Assumption 2: Going Concern
A company is considered a "going concern" for the foreseeable future; it is
assumed to remain in existence indefinitely
Assumption 3: Measurement
Financial statements can only show measurable activities of a corporation such
as its quantifiable resources, its liability, amount of taxes it is facing, etc.
Assumption 4: Periodicity
Companies are required to file annual and interim reports
In the US, quarterly and annual financial reports are required
An accounting year (fiscal year) is frequently aligned with the calendar year
Four Underlying Assumptions of Accounting
(1) Accounting Entity
(2) Going Concern
(3) Measurement
(4) Periodicity
Principle 1: Historical Cost
Financial statements report companies' resources at an initial historical cost
Why?
Represents the easiest measurement method without a need for appraisal and
revaluation
Marking resources up to fair value allows for management discretion and
subjectivity, which US GAAP attempts to minimize by using historical cost
Note: IFRS allows you to write up the asset to fair value, but most companies
use historical value anyways
