Spiceland | Thomas | Herrmann Financial Accounting Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. A Framework for Financial Accounting Chapter 1

1-2 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objectives Describe the two primary functions of financial accounting Understand the business activities that financial accounting measures Determine how financial accounting information is communicated through financial statements Describe the role that financial accounting plays in the decision-making process

1-3 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objectives Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting Identify career opportunities in accounting Explain the nature of the conceptual framework used to develop generally accepted accounting principles

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Part A Accounting as a Measurement/ Communication Process 1-4

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 1 Describe the two primary functions of financial accounting 1-5

1-6 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Accounting A system of maintaining records of a company’s operations and communicating that information to decision makers

1-7 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Accounting Information Managerial accounting: information provided for internal users Financial accounting: information provided for external users Internal users

1-8 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Primary Functions of Financial Accounting Measure business activities Communicate measurements for decision making

1-9 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Illustration 1.2—Framework for Financial Accounting

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 2 Understand the business activities that financial accounting measures 1-10

1-11 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Business Structure Sole proprietorship: business is owned by one person Partnership: business is owned by two or more persons Corporation: business is legally separate from its owners Owner-manager separation typical Limited liability of stockholders

1-12 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Business Activities Financing activities: transactions the company has with investors and creditors Investing activities: transactions involving the purchase and sale of resources that provide benefit for several years Operating activities: transactions that relate to the primary operations of the company

1-13 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Basic Accounting Equation Explains resources and their claims Revenues – Expenses = Net income (loss) Dividends: distributions to owners

1-14 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Business Activities and Their Measurement

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 3 Determine how financial accounting information is communicated through financial statements 1-15

1-16 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Primary financial statements Income statement Statement of stockholders’ equity Balance sheet Statement of cash flows Communicating Through Financial Statements

1-17 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Income Statement Reports the company’s revenues and expenses over an interval of time Shows whether revenues were enough to cover expenses

1-18 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Illustration 1.5—Income Statement

1-19 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Statement of Stockholders’ Equity Stockholders’ Equity = Common Stock + Retained Earnings Summarizes the changes in stockholders’ equity over an interval of time

1-20 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Illustration 1.6—Statement of Stockholders’ Equity

1-21 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Balance Sheet Assets = Liabilities + Stockholders’ Equity Presents the financial position of the company on a particular date

1-22 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Illustration 1.7—Balance Sheet

1-23 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Statement of Cash Flows Measures activities involving cash receipts and cash payments over an interval of time Can be classified into three categories Operating cash flows Investing cash flows Financing cash flows

1-24 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Illustration 1.8—Statement of Cash Flows

1-25 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Illustration 1.9—Links among Financial Statements

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 4 Describe the role that financial accounting plays in the decision-making process 1-26

1-27 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Illustration 1.10—Use of Financial Accounting Information in Investing and Lending Decisions

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Part B Financial Accounting Information 1-28

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 5 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting 1-29

1-30 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Rules of Financial Accounting Investors & Creditors Financial Accounting Information Generally Accepted Accounting Principles (GAAP) make their decisions based on Should be based on formal standards

1-31 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Current Standard Setting United StatesGlobal Financial Accounting Standards Board (FASB) Financial Accounting Standards Board (FASB) International Accounting Standards Board (IASB) International Accounting Standards Board (IASB) Governed by Securities and Exchange Commission (SEC)

1-32 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Role of Auditors Trained individuals hired by a company as an independent party to verify accuracy of that company’s financial statements Role of auditors Help ensure that management has in fact appropriately applied GAAP in preparing the company’s financial statements Help investors and creditors in their decisions by adding credibility to the financial statements.

1-33 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Objectives of Financial Accounting Financial accounting should provide information that: Is useful to investors and creditors in making decisions Helps to predict cash flow Tells about economic resources, claims to resources, and changes in resources and claims

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Part C Careers in Accounting 1-34

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 6 Identify career opportunities in accounting 1-35

1-36 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Illustration 1.14—Some Career Options

1-37 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Illustration 1.14—Some Career Options

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 7 Explain the nature of the conceptual framework used to develop generally accepted accounting principles 1-38

1-39 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Conceptual Framework Appendix Qualitative characteristics Enhancing qualitative characteristics Cost effectiveness constraint Underlying assumptions

1-40 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Illustration 1.15—Qualitative Characteristics of Useful Financial Information

1-41 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Cost Effectiveness Constraint Cost constraint suggests that: Financial accounting information is provided only when the benefits of doing so exceed the costs

1-42 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Underlying Assumptions Identify all economic events with a particular economic entity Need a unit or scale of measurement Provide information of an enterprise at regular time periods Business entity will continue to operate indefinitely Economic Entity Assumption Monetary Unit Assumption Periodicity Assumption Going Concern Assumption

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. End of Chapter