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Intermediate Accounting I Greg Sommers, PhD CPA

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1 Intermediate Accounting I Greg Sommers, PhD CPA /

2 Syllabus Read it, know it.
It is our contract to protect you, me and your fellow students. Read it, know it.

3 Expectations – Content
Accounting is different than 8th grade social science where you learned it and then after the test could forget it. The content you learn in each accounting course is the basis for the next course and must be retained. You are expected to know and be ready to use what you learned in Introductory Financial Accounting. Solid Footing Chapter 3 is essentially a review of Introductory Financial Accounting. Chapter 6 is Time Value of Money which most have learned in prior classes.

4 Expectations – Behavior
Be ready to begin the discussion promptly and attend the section for which you registered. Your superiors, peers, and client personnel will have the same expectations in your firm and client assignments.  You are to occupy available seats from the front of the classroom first. Your superiors and clients would not expect you to sit a significant distance away during meetings/interactions. The use of laptop and other hand-held devices and/or audio/video recording devices during the class period is restricted without prior written consent.  These devices are distracting and their use has the ability to cause others to be skeptical of your intentions and commitment.

Chapter 1: Environment and Theoretical Structure of Financial Accounting.

6 Discussion Question Q1-1 Differentiate broadly between financial accounting and managerial accounting.

7 Discussion Question Q1-4 What is the objective of financial reporting?

8 Objective of Accounting
What is the primary objective of financial accounting? The primary objective of financial accounting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions in their capacity as capital providers.

9 Discussion Question Q1-7 What is the likely limitation of “general-purpose financial statements”?

10 Objective of Financial Accounting
General-Purpose Financial Statements Provide financial reporting information to a wide variety of users. Provide the most useful information possible at the least cost. Equity Investors and Creditors Investors are the primary user group.

11 Objective of Financial Accounting
Entity Perspective Companies viewed as separate and distinct from their owners. Decision-Usefulness Investors are interested in assessing the company’s ability to generate net cash inflows and management’s ability to protect and enhance the capital providers’ investments.

12 Investment-Credit Decisions ─ A Cash Flow Perspective
Shareholders Receive Cash Creditors Receive Cash Dividends Sale of Stock Interest Loan Repayment Accounting information should help investors evaluate the amount, timing, and uncertainty of the enterprise’s future cash flows. Part I. Investors and creditors are both concerned with providing resources, usually cash, to companies with the expectation of receiving more cash in return at some future time. Investors will receive future cash returns in the form of periodic dividends and from the sale of their ownership shares. Creditors will receive future cash returns in the form on interest and repayment of principal. Part II. The primary objective of financial accounting is to provide investors and creditors with financial information that will help them make investment and credit decisions. The information should help investors and creditors evaluate the amounts, timing, and uncertainty of the company’s future cash receipts and payments. With better financial information, investors and creditors will be able to make better resource allocation decisions.

13 What do the numbers mean? (p. 5)
“It’s the accounting.” That’s what many investors seem to be saying these days. Even the slightest hint of any accounting irregularity at a company leads to a subsequent pounding of the company’s stock price. For example, the Wall Street Journal has run the following headlines related to accounting and its effects on the economy. Stocks take a beating as accounting woes spread beyond Enron. Quarterly reports from IBM and Goldman Sachs sent stocks tumbling. VeriFone finds accounting issues; stock price cut in half. Bank of America admits hiding debt. Facebook, Zynga, Groupon: IPO drops due to accounting, not valuation. It now has become clear that investors must trust the accounting numbers, or they will abandon the market and put their resources elsewhere. With investor uncertainty, the cost of capital increases for companies who need additional resources. In short, relevant and reliable financial information is necessary for markets to be efficient.

14 What do the numbers mean? (p. 6)
In addition to providing decision-useful information about future cash flows, management also is accountable to investors for the custody and safekeeping of the company’s economic resources and for their efficient and profitable use. For example, the management of The Hershey Company has the responsibility for protecting its economic resources from unfavorable effects of economic factors, such as price changes, and technological and social changes. Because Hershey’s performance in discharging its responsibilities (referred to as its stewardship responsibilities) usually affects its ability to generate net cash inflows, financial reporting may also provide decision-useful information to assess management performance in this role.

15 Financial Accounting Environment
Relevant financial information is provided primarily through financial statements and related disclosure notes. Balance Sheet Income Statement Statement of Cash Flows Statement of Shareholders’ Equity The primary means that profit-oriented companies use to provide financial information to investors, creditors and other external parties is through financial statements and their accompanying disclosure notes. The four financial statements used most frequently for this purpose are the: Balance Sheet. Income Statement. Statement of Cash Flows. Statement of Shareholders’ Equity.

16 Expectation GAAP What the public thinks accountants should do vs. what accountants think they can do. Difficult to close in light of accounting scandals. Sarbanes-Oxley Act (2002). Public Company Accounting Oversight Board (PCAOB).

17 Financial Reporting Challenges
Non-financial measurements. Forward-looking information. Soft assets. Timeliness Understandability

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