FINANCIAL ACCOUNTING SUMMARY
What is Accounting?
- Accounting as language of business
- Basic Accounting Theory:
a) focuses on decision usefulness for investors
facilitates investment decisions
provides information about amount/timing/uncertainty of future CFs
b) conceptual Framework
quantifies business activities:
maps economic events into financial statement
summarises transactions and economic event in simple terms
- where/for whom?:
a) Internal: look accurate (Managerial Accounting)
b) External: look good/profit (Financial Accounting, GAAP)
c) Government: look “poor”
GAAP and IFRS
GAAP (Generally Accepted Accounting Principles): standard framework of guidelines for FA
- Role: ensure that financial statements clearly present the economic condition and performance
of the company
- U.S.GAAP: pronouncements by FASB (financial accounting standard boards) statements
aggressive, rule-based, flexible in new situations
- German GAAP: pronouncements by HGB (the German Commercial Code)
very conservative, because most German companies finance their actions through
debt
IFRS (International Financial Reporting Standards): common global language for business affairs
neutral and principle-based
Principal Financial Statements: annual/quarterly reports to shareholders
- Balance sheet (left half: assets, right side: liabilities and equity; should be in balance; no revenue
or expenses)
Change in cash from previous year equals final cashflow number from Cashflow
Statement
- Income Statement (How much you won and lost (+,-,=), net income: retained earnings in
shareholders equity (BS))
Retained Earnings (end of period) = Retained Earnings (beg. of period) + net income
- dividends
- Statement of Cash Flows (In- and outflow: operating-, investing- & financing activities)
- Statement of changes in Shareholder’s Equity
, Balance Sheet
- Current assets/ non-current assets/ - liabilities:
Current assets: firm expects payment or receipt of assets within one year or
operating cycle
Non-current assets: “ in more than one year
- US GAAP vs IFRS:
US GAAP: from most liquid to least liquid
IFRS: from least liquid to most liquid
- Asset recognition (all must be met):
a) probable future economic benefit
b) entity owns/ controls the right to use the item (risks and rewards)
c) event that provides right to receive item has occurred
d) the future benefit can be measured/ quantified with sufficient reliability
- Liability recognition
a) require a probable future benefit transfer that the firm has little or no discretion to
avoid
b) represent a present obligation
c) are a result of a past transaction
d) are quantifiable with sufficient reliability
What is Accounting?
- Accounting as language of business
- Basic Accounting Theory:
a) focuses on decision usefulness for investors
facilitates investment decisions
provides information about amount/timing/uncertainty of future CFs
b) conceptual Framework
quantifies business activities:
maps economic events into financial statement
summarises transactions and economic event in simple terms
- where/for whom?:
a) Internal: look accurate (Managerial Accounting)
b) External: look good/profit (Financial Accounting, GAAP)
c) Government: look “poor”
GAAP and IFRS
GAAP (Generally Accepted Accounting Principles): standard framework of guidelines for FA
- Role: ensure that financial statements clearly present the economic condition and performance
of the company
- U.S.GAAP: pronouncements by FASB (financial accounting standard boards) statements
aggressive, rule-based, flexible in new situations
- German GAAP: pronouncements by HGB (the German Commercial Code)
very conservative, because most German companies finance their actions through
debt
IFRS (International Financial Reporting Standards): common global language for business affairs
neutral and principle-based
Principal Financial Statements: annual/quarterly reports to shareholders
- Balance sheet (left half: assets, right side: liabilities and equity; should be in balance; no revenue
or expenses)
Change in cash from previous year equals final cashflow number from Cashflow
Statement
- Income Statement (How much you won and lost (+,-,=), net income: retained earnings in
shareholders equity (BS))
Retained Earnings (end of period) = Retained Earnings (beg. of period) + net income
- dividends
- Statement of Cash Flows (In- and outflow: operating-, investing- & financing activities)
- Statement of changes in Shareholder’s Equity
, Balance Sheet
- Current assets/ non-current assets/ - liabilities:
Current assets: firm expects payment or receipt of assets within one year or
operating cycle
Non-current assets: “ in more than one year
- US GAAP vs IFRS:
US GAAP: from most liquid to least liquid
IFRS: from least liquid to most liquid
- Asset recognition (all must be met):
a) probable future economic benefit
b) entity owns/ controls the right to use the item (risks and rewards)
c) event that provides right to receive item has occurred
d) the future benefit can be measured/ quantified with sufficient reliability
- Liability recognition
a) require a probable future benefit transfer that the firm has little or no discretion to
avoid
b) represent a present obligation
c) are a result of a past transaction
d) are quantifiable with sufficient reliability
