Financial Accounting ACCT 201

1. Definition Accounting is the process of identifying, measuring, recording and communicating information about a company to users for making economic decisions Accounting is the process of identifying, measuring, recording and communicating information about a company to users for making economic decisions

2. Role of Accounting in Society Corporations ShareholdersCreditors Need capital Need information Company’s private accountants prepare financial statements IndependentCPAs Make economic decisions based on financial statements provided by companies Make economic decisions based on financial statements provided by companies Private accountants Public accountants Accounting related employment GAAP

The role of accounting (continued) Provide information about a company for making economic decisions Provide information about a company for making economic decisions Investors Investors Creditors Creditors Customers and suppliers Customers and suppliers Regulators and unions Regulators and unions Safeguard company’s assets Safeguard company’s assets Fulfill stewardship responsibilities Fulfill stewardship responsibilities Most importantly, we keep the score for American businesses Most importantly, we keep the score for American businesses

3. Generally Accepted Accounting Principles (GAAP) Guidelines issued by authoritative bodies for processing accounting information Guidelines issued by authoritative bodies for processing accounting information The primary objective of this course to study GAAP in the U.S. The primary objective of this course to study GAAP in the U.S. Each country has its own GAAP Each country has its own GAAP

4. Accounting Standard Setting in the U.S. SEC (Securities Exchange Commission) SEC (Securities Exchange Commission) Regulate all public companies Regulate all public companies Has the legal authority to set accounting standards, but historically has delegated the standard-setting responsibility to the private sector Has the legal authority to set accounting standards, but historically has delegated the standard-setting responsibility to the private sector FASB (Financial Accounting Standard Board) FASB (Financial Accounting Standard Board) Has been responsible for setting accounting standards in the U.S. since 1973 Has been responsible for setting accounting standards in the U.S. since 1973 Issues standards and interpretations, and concepts Issues standards and interpretations, and concepts AICPA (American Institute of Certified Public Accountants) AICPA (American Institute of Certified Public Accountants) The professional organization of the CPAs in the U.S. The professional organization of the CPAs in the U.S. Administers CPA exams Administers CPA exams Sets auditing standards Sets auditing standards

5. Financial statements (F/S) F/S is the means by which accountants communicate information about a company to users F/S is the means by which accountants communicate information about a company to users Four basic F/S: Four basic F/S: Income statement: presents information about the operating performance of a company during a period of time Income statement: presents information about the operating performance of a company during a period of time Statement of shareholder’s equity: Explain the change in shareholders’ equity during a period of time Statement of shareholder’s equity: Explain the change in shareholders’ equity during a period of time Balance sheet: presents company’s financial position as of the end of the year Balance sheet: presents company’s financial position as of the end of the year Statement of cash flows: explains where the cash comes from and what the cash was used for Statement of cash flows: explains where the cash comes from and what the cash was used for

Balance Sheet As of Dec. 31, 2005 AssetsLiabilities and Shareholders’ Equity Cash$ 7,730,000Accounts payable (due 2006)$10,000,000 Accounts receivable 8,500,000Notes payable (due 2008) 50,000,000 $60,000,000 Inventories 10,000,000Capital Stock 40,000,000 Plant Asset 80,000,000Retained earnings 6,230,000 $46,230,000 Total assets$106,230,000Total L and shareholders’ equity $106,230,000 Statement of Shareholders’ Equity For the year ended Dec. 31, 2005 Capital Stock: Beginning CS $40,000,000 Add: new stock issued 0 Less: stocks retired/reacquired 0 Ending Capital Stock$40,000,000 Retained Earnings: Beginning retained earnings$ 5,500,000 Add: net income 11,630,000 Less: dividends 9,900,000 Ending retained earnings$ 6,230,000 Total shareholders’ equity$46,230,000 Green Bay Corporation Income Statement For the year ended Dec. 31, 2005 Revenues: Fishing revenue$21,300,000 Passenger service revenue 12,560,000$33,860,000 Expenses: Rent expense 4,000,000 Salaries and wages, taxes 18,230,000 22,230,000 Net Income$11,630,000

4. Evaluating Green Bay Corporation’s performance and financial condition Operating performance: Operating performance: Return on shareholders’ equity (ROE) Return on shareholders’ equity (ROE) Liquidity: ability to pay short-term obligations Liquidity: ability to pay short-term obligations Current ratio Current ratio Solvency: ability to pay all the debts Solvency: ability to pay all the debts Total Liability to total assets ratio Total Liability to total assets ratio