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Multi step income statement

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Gross Profit -operating expenses =income from operations +other revenues and gains -other expenses and losses =income before tax -income tax =net income

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Gross profit

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Sales Revenue -COGS

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Income from operations

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gross profit -operating expenses

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Financial Accounting

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measures, classifies, and summarizes in report from those activities and that information which relate to the enterprise as a whole for use by parties both internal and external to a business enterprise

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Managerial Accounting

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measures, classifies, and summarizes in report form enterprise activities, but the communication is for the use of internal, managerial parties and relates to more to subsystems of the entity. Managerial accounting is management decision oriented and directed more toward product line, division, and profit center reporting

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Identify Major Financial Statements

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balance sheet, income statement, statement of cash flows, and statement of changes in owner's or stockholder's equity and also footnotes/disclosure notes

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What is financial reporting?

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Examples include the president's letter or supplementary schedules in the corporate annual report, prospectuses, reports filed with government agencies, news releases, management's forecasts, and social or environmental impact statements.

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What are its objectives?

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The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in decisions about providing resources to the entity investments and loans or other credit forms.

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Why are accounting standards needed?

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Without a common set of standards each enterprise could and would develop its own theory structure and set of practices resulting in non comparability among enterprises

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Who are the Major Policy setting bodies and their role in the process?

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The SEC- has the power to prescribe in whatever detail it desires the accounting practices and principles to be employed by the companies that fall within its jurisdiction FASB - SEC oversight AICPA

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AICPA and its Role

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American Institute of Certified Public Accountants is the national professional organization for Certified Public Accountants in the United States. AICPA works with the state CPA organizations and gives priority to those areas where public reliance on CPA skills is most significant.

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FASB and its Role

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Financial Accounting Standards Board. The Primary body which currently establishes and improves financial accounting and reporting standards for the guidance of issues, auditors, users, and others. The mission of the FASB is to establish and improve financial accounting and reporting standards to provide decision useful information to investors and other users of financial reports.

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IASB and IFRS and their Roles

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International Accounting Standards Board, bring transparency, accountability and efficiency to financial markets around the word. The work serves the public interest by forecasting trust, growth and long-term financial stability in the global economy. International Financial Reporting Standards developed by the international Accounting Standards Board.

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Types of Pronouncements

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(1) Standards and interpretations: Accounting Standards Updates (2) Financial Accounting concepts: helps FASB avoid problem to problem approach the board uses to develop new standards of financial accounting and reporting (3) Technical Bulletins - set up by FASB to help with standards and interpretations when needed.

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What is GAAP?

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Generally Accepted Accounting Principles, Financial standards issued by the FASB are considered GAAP

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The codification of GAAP

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FASB created the codification of GAAP in order to provide in one place all of the authoritative literature related to a particular topic under GAAP to be easily accessed by the everyday user to make it easier for businesses to understand and better follow GAAP.

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GAAP Documents

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AICPA, Accounting Interpretations, FASB Implementation Guides (Q and A), Widely Recognized and prevalent industry practices, FASb emerging issues task force, AICPA AcSEC Practice Bulletins, FASB Technical Bulletins, AICPA industry audit and accounting guides, AICPA statements of positions, FASB standards interpretations and staff positions, APB opinions and AICPA accounting research bulletins.

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Sarbanes-Oxley (SOX)

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Sarbanes was passed in response of accounting scandals like Enron, SunBeam, and Xerox. The law increased the resources for the SEC to combat fraud and curb poor reporting practices. They have improved its policing efforts by approving new auditor independence rules and materiality guidelines for financial reporting Implements stronger independence rules for auditors, requires CEO and CFOs to personally certify that financial statements and disclosures are accurate and complete, and requires audit committees to be compromised of independent members and members with financial expertise, and requires codes of ethics for senior financial officers.

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Public Company Accounting Oversight Board

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They have oversight and enforcement authority and establishes auditing, quality control. and independence standards and rules.

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Ethics in the Financial Envrionment

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Ethical questions can't always be answered by simply adhering to GAAP or following the rules of the profession and technical competence is not enough when encountering ethical decisions. The decision is more difficult because there is no comprehensive ethical system to provide guidelines.

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Need for Conceptual Framework

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A conceptual framework underlying financial accounting is important because it can lead to consistent standards and it prescribes the nature, function, and limits of financial accounting and financial statements. Increase understanding and confidence. Increases comparability among company's financial statements.

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FASB's 7 Statements of Financial Accounting Concepts

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(1) - "objectives of financial reporting by business enterprises" - presents the goals and purpose of accounting. (2) - "qualitative characteristics of Accounting Information examines the characteristics that make accounting information useful (3) - "elements of financial statements of business enterprises" provides definitions of items in financial statements, such as assets, liabilities, revenues, and expenses. (4) - "recognition and measurement in financial statements of business enterprises sets forth fundamental recognition and measurement criteria and guidance on what information should be formally incorporated into financial statements and when. (5) "elements of financial statements" replaces SPAC 3 and expands its scope to include not for profit organizations (6) No. 7 using cash flow information and present value in accounting measurements. Provides a framework for using expected future cash flows and present values as basis for measurement (7)"The objective of general purpose of financial reporting and qualitative characteristics of useful financial information replaces SFAC no. 1 and no. 2.

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ISAB's Conceptual Framework Project

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joint with FASB: the objective of the joint framework is to develop a conceptual framework that leads to standards that are principles-based and internally consistent and that leads to standards that are principles based and internally consistent and that leads to the most useful financial reporting.

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ISAB's Conceptual Framework Continued

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Agreed on the objective of financial reporting and a common set of desired qualitative characteristics. The converged framework should be a single document, unlike the two conceptual frameworks that presently exist. Both have similar measurement principles based on historical cost and fair value. IFRS have adopted fair value reporting more broadly than GAAP. The monetary unit assumption is part of each framework and the economic entity assumption is also apart of each framework. Though the conceptual framework underlying the IFRS is very similar to that used to develop GAAP, the elements identified and their definitions under IFRS are different.

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Conceptual Framework for Financial Reporting Illustration 2-1

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First Level objectives - the why the purpose of accounting. Second Level Fundamental concepts.

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Second Level Fundamental Concepts

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Explains qualitative characteristics of accounting and defines the elements of financial statements. Bridges the why of accounting "objective" to the "how" of accounting which is recognition and measurement.

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Primary Qualities

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Relevance and reliability (Faithful representation) - Relevance - the accounting information must be capable of making a difference in decision. Predictive Value - if it has value as an input to predictive processes used by investors to form their own expectations about the future. Confirmatory Value - users can confirm or correct prior expectations. Materiality - is a company specific aspect of relevance.

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Faithful Represenation

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Means that the numbers and descriptions math what really existed or happened.

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Completeness

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means that all of the information that is necessary for faithful representation is provided.

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Neutrality

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means that a company cannot select information to favor one set of interested parties over another

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Free From Error

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an information item that is free from error will be a more accurate representation of a financial item

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Comparability

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information that is measured and reported in a similar manner for different companies is considered comparable. It enables users to identify the real similarities and differences in economic events between companies

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Consistency

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is present when a company applies the same accounting treatment to similar events from period to period

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Elements of Financial Statements

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Page 53

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Economic Entity

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means that economic activity can be identified with a particular unit of accountability. A company keeps its activity separate and distinct form its owners and any other business units.

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Going Concern

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that the company will have a long life. We expect companies to last long enough to fulfill their objectives and commitments.

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Several Implications

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The historical cost principle would be of limited usefulness if we assume eventual liquidation and depreciation and amortization policies are justifiable and appropriate only if we assume some preferences to the company. Only where the liquidation appears imminent is the assumption inapplicable.

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Monetary Unit

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Means that money is common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis. The monetary unit is relevant, simple, and universally available, understandable and useful.

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Periodicity

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to measure the results of a company's activity accurately we would need to wait until it liquidates. Periodicity implies that a company can divide its economic activities into artificial time period

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Historical Cost

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Requires that companies account for and report many assets and liabilities on the basis of acquisition price. It is generally thought to be verifiable.

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Fair Value

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is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

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Revenue Recognition

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Companies recognize revenue in the accounting period in which the performance obligation is satisfied. Record when the service is performed and not when you are paid for the service.

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Expense Recognition

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See Illustration 2-5. Step 1 - Identify the contracts with the customer. Step 2 - identify the separate performance obligations in the contract. Step 3 - Determine the transaction price. Step 4 - allocate the transaction price to separate performance obligations. Step 5 - recognize revenue when each performance obligation is satisfied.

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Cost Constraint

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Materiality, Industry Practices, and Conservatism

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Two Assumptions that are central to the IASB conceptual framework

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That financial statements are prepared on an accrual basis. That the reporting entity is a going concern.

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Differences in Framework

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IFRS has adopted fair value more broadly. IASB has not issued a similar GAAP concept statement for using Cash Flows. The monetary into assumption is part of each framework however the unit measure will vary depending on the type of currency when dealing with other countries. IFRS makes an explicit assumption that financial statements are prepared on an accrual basis. The economic entity assumption is a apart of each framework however in different culture it may vary.

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GAAP and IFRS

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GAAP is more rules based more detail involved and more specific because of the increase in litigation. IFRS - more principle based.

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Comprehensive Income

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it is recognized but not realized can't be spent it would be shown as separate income statement or part of the income statement. Found on a multistep income statement. Increase in assets less liabilities during the year adding distributions to owners and subtracting investments by owners.

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Proprietorship or Partnership

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Owner's Capital or Owner's Drawing

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Corporations

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Common Stock, Paid-in capital excess of par, Dividends, Retained Earnings.

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Financial Statements and Ownership Structure

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The stockholders equity section of the balance sheet reports common stock and retained earnings. The income statement reports revenues and expenses. The statement of retained earnings reports to dividends. Because a company transfers dividends revenues and expenses to retained earnings at the of the period a change in any of these three items affects stockholders equity.

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The Accounting Cycle - Step 1

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Journalization General Ledger Cash Receipts Journal Cash Disbursements Journal Purchases Journal Sales Journal Other special journals

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The Accounting Cycle - Step 2

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Posting General Ledger (monthly) and subsidiary ledgers (daily)

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The Accounting Cycle - Step 3

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Trial Balance Preparation

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The Accounting Cycle - Step 4

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Adjustments ( Accruals, Prepayments, Estimated Items)

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The Accounting Cycle - Step 5

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Adjusted Trial Balance

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The Accounting Cycle - Step 6

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Statement Preparation (Income Statement, Balance Sheet, Cash Flows, and Retained Earnings)

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The Accounting Cycle - Step 7

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Closing (nominal accounts - revenues and expenses)

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The Accounting Cycle - Step 8

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Post Closing Trial Balance (optional)

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The Accounting Cycle - Step 9

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Reversing Entries (optional)

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Reversing Entries

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Reversing entries are reversing the effects of certain adjusting entries by making a reverse entry at the beginning of the next accounting period. It is the exact opposite of the adjusting entry in the previous accounting period.

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Adjusting Entries - Types of Adjusting Entries

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Prepaid Expenses - Expenses paid in cash before they used or consumed. Unearned Revenues - Cash received before services are performed. Accrued Revenues - revenues for services performed but not yet received in cash or recorded. Accrued Expenses - expenses incurred but not yet paid in cash or recorded.

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Closing Entries

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Page 98

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Usefulness of the income statement

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comparability, predict future cash flows, help find risks

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Chapter 4

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Textbook reading

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