5 Performance MeasuresIndicate whether managers are achieving business goals and whether business activities are well managed.Types of performance measures:Earned incomeRelationship of expenses to revenueCash flowRelationship of money owed to total resources controlled
7 Accounting and Capital Allocation Resources are limited. Efficient use of resources often determines whether a business thrives.Capital Allocation ProcessFinancial ReportingUsersCapital AllocationInformation to help users with capital allocation decisions.Investors, creditors, and other usersThe process of determining how and at what cost money is allocated among competing interests.LO 2 Explain how accounting assists in the efficient use of scare resources.
9 Financial and Management Accounting Accounting’s role is divided into two categories:Management accountingFinancial accountingFunctions overlap.Primary difference is the principal users of the information.
10 Uses of Financial Information Ethics In Financial ReportingStandards of conduct by which one’s actions are judged as right or wrong, honest or dishonest, fair or not fair, are Ethics.Recent financial scandals include: Enron, WorldCom, HealthSouth, AIG, and others.Congress passed Sarbanes-Oxley Act of 2002.Effective financial reporting depends on sound ethical behavior.
12 Users and Uses of Financial Information Review QuestionEthics are the standards of conduct by which one's actions are judged as:right or wrong.honest or dishonest.fair or not fair.all of these options.SO 2 Identify the users and uses of accounting information.
13 Accounting Measurement Four basic questions:What is measured?When should the measurement be made?What value should be placed on what is measured?How should what is measured be classified?
14 Business TransactionEconomic events that affect the financial position of a business entity.An exchange of value between two or more parties.Purchase, sale, payment, collection, etc.A Nonexchange transaction.Loss from fire, flood, theft.Physical wear and tear on equipment.Accumulation of interest.
15 Forms of Business Organization ProprietorshipPartnershipCorporationGenerally owned by one person.Often small service-type businessesOwner receives any profits, suffers any losses, and is personally liable for all debts.Owned by two or more persons.Often retail and service-type businessesGenerally unlimited personal liabilityPartnership agreementOwnership divided into shares of stockSeparate legal entity organized under state corporation lawLimited liabilityService Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation.Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt.Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets.Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees.Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss:difference between the actual return and the expected return on plan assets and,amortization of the unrecognized net gain or loss from previous periodsSO 5 Explain the monetary unit assumption and the economic entity assumption.
17 Financial StatementsCompanies prepare four financial statements from the summarized accounting data:Balance SheetIncome StatementRetained Earnings StatementStatement of Cash Flows
18 Review Question Financial Statements Net income will result during a time period when:assets exceed liabilities.assets exceed revenues.expenses exceed revenues.revenues exceed expenses.
19 Financial Statements Balance Sheet Reports the assets, liabilities, and stockholder’s equity at a specific date.Assets listed at the top, followed by liabilities and stockholder’s equity.Total assets must equal total liabilities and stockholder’s equity.
20 Retained Earnings Statement Financial StatementsRetained Earnings StatementBalance SheetThe ending balance in retained earnings is needed in preparing the balance sheet
21 Retained Earnings Statement Financial StatementsRetained Earnings StatementStatement indicates the reasons why retained earnings has increased or decreased during the period.
22 Financial Statements Income Statement Reports revenues and expenses for a specific period of time.Net income – revenues exceed expenses.Net loss – expenses exceed revenues.
23 Retained Earnings Statement Financial StatementsRetained Earnings StatementIncome StatementNet income is needed to determine the ending balance in stockholder’s equity.
24 Statement of Cash Flows Financial StatementsStatement of Cash FlowsAnswers:Where did cash come from during the period?How was cash used during the period?What was the change in the cash balance during the period?
25 Review Question Financial Statements Which of the following financial statements is prepared as of a specific date?Balance sheet.Income statement.Owner's equity statement.Statement of cash flows.
26 Other Elements of an Annual Report U.S. companies that are publicly traded must provide shareholders with an annual report.The annual report always includes:Financial statements.Management discussion and analysis.Notes to the financial statements.Independent auditor's report.
27 Other Elements of an Annual Report Auditor’s ReportStandard unqualified opinion – auditor expresses the opinion that the financial statements are presented fairly, in all material respects, in conformity with GAAP.
28 Generally Accepted Accounting Principles Various users need financial informationFinancial StatementsBalance SheetIncome StatementStatement of Stockholders’ EquityStatement of Cash FlowsNote DisclosureThe accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced.Generally Accepted Accounting Principles (GAAP)
29 Generally Accepted Accounting Principles Standard Setting in a Political EnvironmentAccounting standards are as much a product of political action as they are of careful logic or empirical findings.
30 Government (SEC, IRS, other agencies) Standard SettingBusiness EntitiesUser Groups that Influence Accounting StandardsCPAs andAccounting FirmsFinancialCommunityAICPA (AcSEC)FASBPreparers (e.g., FEI)AcademiciansGovernment (SEC, IRS, other agencies)Investing PublicIndustryAssociationsAccounting standards, interpretations, and bulletins
31 Generally Accepted Accounting Principles Organizations:Securities and Exchange Commission (SEC).Financial Accounting Standards Board (FASB).Public Company Accounting Oversight Board (PCAOB).American Institute of Certified Public Accountants (AICPA).International Accounting Standards Board (IASB).
32 Securities and Exchange Commission Established by federal governmentAccounting and reporting for public companiesSecurities Act of 1933Securities Act of 1934Encouraged private standard-setting bodySEC requires public companies to adhere to GAAPSEC OversightEnforcement Authority
33 Issues in Financial Reporting International Accounting StandardsTwo sets of standards accepted for international use:U.S. GAAP, issued by the FASBInternational Financial Reporting Standards (IFRS), issued by the IASBFASB and IASB recognize that global markets will best be served if only one set of GAAP is used.