Wall Street Prep: Accounting Crash Course
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 perfor-
mance is important for:
The firm's officers (managers and em-
What is Accounting? ployees)
Investors
Lenders
General public
Standard financial statements serve as
a "yardstick" of communicating financial
performance to the general public.
Enables managers to make corporate
decisions
Why is Accounting Important?
Enables the general public to make in-
vestment decisions
Used by a variety of organizations - from
the federal government to non-profit or-
ganizations to small businesses to cor-
porations
We will discuss accounting rules as they
pertain to publicly-traded companies
Who Uses Accounting?
Accounting attempts to standardize fi-
nancial information and follows rules and
regulations
These rules are called Generally Accept-
Accounting Regulations
ed Accounting Principles (GAAP)
In the US, the Securities and Exchange
Commision (SEC) authorizes the Finan-
cial Accounting Standards Board (FASB)
, Wall Street Prep: Accounting Crash Course
to determine accounting rules
GAAP comes from the Statements of
Financial Accounting Standards (SFAS)
issued by the FASB
A US federal agency established by the
US Congress in 1934
Primary mission is "to protect investors
and maintain the integrity of the securi-
ties markets"
Division of Corporate Finance oversees
An Overview of the SEC 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)
An Overview of FASB Decisions are influenced by:
International Financial Reporting Stan-
dards (IFRS)
, Wall Street Prep: Accounting Crash Course
Over 100 countries, including the EU,
UK, Canada, Australia, and Russia, have
adopted a unified set of international ac-
counting standards (IFRS)
Although we have seen unprecedented
convergence over the last few years be-
tween US GAAP and IFRS, some differ-
ences remain
A company is considered a separate "liv-
ing" enterprise, apart from its owners
Assumption 1: Accounting Entity
In other words, a corporation is a "fiction-
al" being
A company is considered a "going con-
Assumption 2: Going Concern cern" for the foreseeable future; it is as-
sumed to remain in existence indefinitely
Financial statements can only show
measurable activities of a corporation
Assumption 3: Measurement
such as its quantifiable resources, its lia-
bility, amount of taxes it is facing, etc.
Companies are required to file annual
and interim reports
In the US, quarterly and annual financial
Assumption 4: Periodicity
reports are required
An accounting year (fiscal year) is fre-
quently aligned with the calendar year
(1) Accounting Entity
Four Underlying Assumptions of Ac- (2) Going Concern
counting (3) Measurement
(4) Periodicity
Principle 1: Historical Cost
, Wall Street Prep: Accounting Crash Course
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 subjec-
tivity, which US GAAP attempts to mini-
mize by using historical cost
Note: IFRS allows you to write up the
asset to fair value, but most companies
use historical value anyways
Governs the company's timing in record-
ing its revenues (i.e. sales) and associat-
ed expenses
2) Revenue Recognition: Accrual ba-
sis of accounting dictates that revenues
must be recorded when earned and
Principles 2 and 3: Accrual Account-
measurable
ing (Revenue Recognition and Matching
3) Matching Principle: Under the match-
Principle)
ing principle, costs associated with mak-
ing a product must be recorded during
the same period as revenue generated
from that product
Exercise Answer: 1) 1/4/15; 2) 1/4/15
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 perfor-
mance is important for:
The firm's officers (managers and em-
What is Accounting? ployees)
Investors
Lenders
General public
Standard financial statements serve as
a "yardstick" of communicating financial
performance to the general public.
Enables managers to make corporate
decisions
Why is Accounting Important?
Enables the general public to make in-
vestment decisions
Used by a variety of organizations - from
the federal government to non-profit or-
ganizations to small businesses to cor-
porations
We will discuss accounting rules as they
pertain to publicly-traded companies
Who Uses Accounting?
Accounting attempts to standardize fi-
nancial information and follows rules and
regulations
These rules are called Generally Accept-
Accounting Regulations
ed Accounting Principles (GAAP)
In the US, the Securities and Exchange
Commision (SEC) authorizes the Finan-
cial Accounting Standards Board (FASB)
, Wall Street Prep: Accounting Crash Course
to determine accounting rules
GAAP comes from the Statements of
Financial Accounting Standards (SFAS)
issued by the FASB
A US federal agency established by the
US Congress in 1934
Primary mission is "to protect investors
and maintain the integrity of the securi-
ties markets"
Division of Corporate Finance oversees
An Overview of the SEC 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)
An Overview of FASB Decisions are influenced by:
International Financial Reporting Stan-
dards (IFRS)
, Wall Street Prep: Accounting Crash Course
Over 100 countries, including the EU,
UK, Canada, Australia, and Russia, have
adopted a unified set of international ac-
counting standards (IFRS)
Although we have seen unprecedented
convergence over the last few years be-
tween US GAAP and IFRS, some differ-
ences remain
A company is considered a separate "liv-
ing" enterprise, apart from its owners
Assumption 1: Accounting Entity
In other words, a corporation is a "fiction-
al" being
A company is considered a "going con-
Assumption 2: Going Concern cern" for the foreseeable future; it is as-
sumed to remain in existence indefinitely
Financial statements can only show
measurable activities of a corporation
Assumption 3: Measurement
such as its quantifiable resources, its lia-
bility, amount of taxes it is facing, etc.
Companies are required to file annual
and interim reports
In the US, quarterly and annual financial
Assumption 4: Periodicity
reports are required
An accounting year (fiscal year) is fre-
quently aligned with the calendar year
(1) Accounting Entity
Four Underlying Assumptions of Ac- (2) Going Concern
counting (3) Measurement
(4) Periodicity
Principle 1: Historical Cost
, Wall Street Prep: Accounting Crash Course
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 subjec-
tivity, which US GAAP attempts to mini-
mize by using historical cost
Note: IFRS allows you to write up the
asset to fair value, but most companies
use historical value anyways
Governs the company's timing in record-
ing its revenues (i.e. sales) and associat-
ed expenses
2) Revenue Recognition: Accrual ba-
sis of accounting dictates that revenues
must be recorded when earned and
Principles 2 and 3: Accrual Account-
measurable
ing (Revenue Recognition and Matching
3) Matching Principle: Under the match-
Principle)
ing principle, costs associated with mak-
ing a product must be recorded during
the same period as revenue generated
from that product
Exercise Answer: 1) 1/4/15; 2) 1/4/15
