1. ACCOUNTING ASW SUMMER 2005 Mark Lang

2. OVERVIEW Overview of ASW - work through syllabus Overview of accounting - goals - structure - major financial statements

11. Basics What is a company? Why do companies exist? How large should a company be?

12. Role of Accounting The communication problem - How to condense millions of transactions in a meaningful way With whom does it communicate? - Investors--debt and equity - Employees--CEO, store manager, inventory managers, other employees - Taxing authorities--state and local - Others (government, labor, etc.)

13. Financial Accounting Why do investors need information? - What to invest in - Performance of management separation of ownership and control What kind of information do they need? - To forecast: the amount timing uncertainty of future cash flows

14. Investor Communication Problem: - atomistic investors - diversified investors Answer - generally accepted accounting principles (GAAP)

15. US GAAP Congress Securities and Exchange Commission Financial Accounting Standards Board - American Institute of CPAs - Emerging Issues Task Force, etc. IASB may change all that

16. Basic Statements Balance Sheet –net worth Income Statement –change in net worth through firm activities Statement of Cash Flows –change in cash Notes to the Statements Audit Opinion

17. Balance Sheet Snap shot of the firm at period-end Most basic financial statement - All others derive from it - Assets - Liabilities - Owners’ Equity

18. Assets = Liabilities + Owners’ Equity Assets--provide future benefits to the firm - cash or expected to provide cash in future current--cash, sold or consumed within year noncurrent--held for longer periods

20. Liabilities--creditor claims - expected to require future cash outflows current--due within a year noncurrent--due later Owners’ Equity-- the residual - contributed capital - retained earnings RE 05 = RE 04 + NI 05 - Dividends 05 - Other 05 Other often includes share repurchases I’ll put repurchases and other in dividends for now Problem 1.22

22. Income Statement Derives from the balance sheet - change in net assets due to operations - assets = liabilities + retained earnings + contributed capital - RE 05 = RE 04 + NI 05 - Dividends 05

23. Net income = Revenue - Expense Revenues - Sales - Other Expenses - Cost of Goods sold: WM—76% of revenues - Selling, Gen. & Admin: WM—18% of rev. - Other: WM—0% of rev. - Income Tax Expense: WM—2% of rev. Problem 1.19

25. Statement of Cash Flows Derives from the balance sheet - Explains change in cash = Cash 05 – Cash 04 - Generally begins with net income - Sections Operating Investing Financing Problem 1-29, 1-34

28. Other Disclosures Notes to the financial statements –accounting policies and details on accounts Audit report Management’s discussion and analysis Segment reporting –geographic and industry segments Quarterly results Five-year summary