WALL STREET PREP ACCOUNTING CRASH COURSE (FRESHMAN
BUSINESS INTIATIVE) | QUESTIONS AND ANSWERS | LATEST
EXAM UPDATE
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
Principles 2 and 3: Accrual Accounting (Revenue Recognition and
Matching Principle)
Governs the company's timing in recording its revenues (i.e. sales) and
associated expenses
2) Revenue Recognition: Accrual basis of accounting dictates that revenues
must be recorded when earned and measurable
3) Matching Principle: Under the matching principle, costs associated with
making 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
Why can't companies immediately record these revenues and expenses?
According to the revenue recognition principle, a company cannot record
revenue until that order is shipped to a customer (only then, is the revenue
actually earned) and collection from that customer is reasonably assured
Why shouldn't a company record an expense when it actually buys the
item?
According to the matching principle, costs associated with the production
of the product should be recorded in the same period as the revenue from
the product's sale
, US GAAP vs. IFRS Accrual Accounting
Principle 4: Full Disclosure
Companies must reveal all relevant economic information that they
determine to make a difference to its users
Such disclosure should be accomplished in the following sections of
companies' reports:
(1) Financial statements
(2) Notes to financial statements
(3) Supplementary information
Four Underlying Principles in Accounting
(1) Historical Cost
(2) Accrual Accounting: Revenue Recognition
(3) Accrual Accounting: Matching Principle
(4) Full Disclosure
Constraint 1: Estimates & Judgments
Certain measurements cannot be performed completely accurately, and
must therefore utilize conservative estimates and judgments
Constraint 2: Materiality
Inclusion and disclosure of financial transactions in financial statements
hinge on their size and effect on the company performing them
Note: Materiality varies across different entities
Constraint 3: Consistency
Each company has to prepare financial statements using measurement
techniques and assumptions which are consistent from one period to
another
Constraint 4: Conservatism
Financial statements should be prepared with a downward measurement
bias
Assets and revenues should not be overstated, while liabilities and expenses
should not be understated
Four Underlying Constraints in Accounting
(1) Estimates & judgments
(2) Materiality
BUSINESS INTIATIVE) | QUESTIONS AND ANSWERS | LATEST
EXAM UPDATE
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
Principles 2 and 3: Accrual Accounting (Revenue Recognition and
Matching Principle)
Governs the company's timing in recording its revenues (i.e. sales) and
associated expenses
2) Revenue Recognition: Accrual basis of accounting dictates that revenues
must be recorded when earned and measurable
3) Matching Principle: Under the matching principle, costs associated with
making 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
Why can't companies immediately record these revenues and expenses?
According to the revenue recognition principle, a company cannot record
revenue until that order is shipped to a customer (only then, is the revenue
actually earned) and collection from that customer is reasonably assured
Why shouldn't a company record an expense when it actually buys the
item?
According to the matching principle, costs associated with the production
of the product should be recorded in the same period as the revenue from
the product's sale
, US GAAP vs. IFRS Accrual Accounting
Principle 4: Full Disclosure
Companies must reveal all relevant economic information that they
determine to make a difference to its users
Such disclosure should be accomplished in the following sections of
companies' reports:
(1) Financial statements
(2) Notes to financial statements
(3) Supplementary information
Four Underlying Principles in Accounting
(1) Historical Cost
(2) Accrual Accounting: Revenue Recognition
(3) Accrual Accounting: Matching Principle
(4) Full Disclosure
Constraint 1: Estimates & Judgments
Certain measurements cannot be performed completely accurately, and
must therefore utilize conservative estimates and judgments
Constraint 2: Materiality
Inclusion and disclosure of financial transactions in financial statements
hinge on their size and effect on the company performing them
Note: Materiality varies across different entities
Constraint 3: Consistency
Each company has to prepare financial statements using measurement
techniques and assumptions which are consistent from one period to
another
Constraint 4: Conservatism
Financial statements should be prepared with a downward measurement
bias
Assets and revenues should not be overstated, while liabilities and expenses
should not be understated
Four Underlying Constraints in Accounting
(1) Estimates & judgments
(2) Materiality
