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financial statments

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1. Balance sheet - firm's financial position 2. Income statement - firm's profitiability 3. Statment of cash flows - firm's cash-generating activity 4. Statement of retained earnings - shareholder's equity 5. Notes

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GAAP

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Generally Accepted Accounting Principles

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Dividends

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Distribution of the firm's assets to owners (most often in cash)

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Creditors

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Provide funds that the firm must repqy, typ. with interest, in specific amounts at specific dates.

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Long-term creditors

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repayment from borrower over a periord that exceeds a year

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Balance Sheet

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- also called statement of financial position -provides information at a point in time -statements of prior years often required - lists: - assets - liabilities - shareholders equity

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Assets

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Economic resources to provide future economic benifits to a firm (buildings and equipmenet)

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Liabilities

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Creditors claims for funds; ussally because goods or services have been provided Firm has previously recieved benifits for which it must pay a specified amount on a specified date

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Shareholder Equity

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Amounts of funds owners have provided and thier claims on the assets of a firm

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Retained Earnings

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Represents the Net Assets (= total assets - total liabilities)

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Ballance Sheet Looks at resources from two angles

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Assets the firm currently holds Assets = Liabilities + Shareholder's equity Claims of creitors and owners who provided funds Investing = Financing Resources = Sources of Resources Resources = Claims on Resources

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Current Assets

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cash and ssets that firm expects to turn into chs within one year

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Current Liabilities

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oblicgations a firm expects to pay within one year

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Noncurrent Assets

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typically held and used for several years (land, buildigns, euipment, patents, long-term investments in securities)

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Noncurrent Liabiliites and Shareholders Equity

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sources of funds where supplier of funds does not expect to recive them all back within the next year.

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Historical Amount

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acquisition costs of assets or amount of funds orginally obtained from creditors or owners

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Current Amount

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current value as of the balance sheet date

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Income Statement

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(statement of profit and loss) terms of Net Income, Earnings and Profit are interchangeable Provides information on profitability Reports amounts for a period of time (the reporting period)

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Net Income

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Net Income = revenues - expenses

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Net Loss

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expenses for a period exceed revenues

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Revenues

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measusre the inflows of assets from selling goods / services to customers

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Expenses

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measure the outlfow of assets used in generating revenues means that an asset decreases or a liability increases

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Statement of Cash Flows

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reports informtion about cash generated from operating, investing, and financing activities during specified time periods explains change in chas between the beginning and end of the period; and seperately diplays changes in catagories Sections: - operating - investing - financing

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Statemenet of Shareholds' Equity

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displays componants of shareholders' equity; including common shares and retainned earnings

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Financial Reporting Process involves:

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- Managers and govering boards of reporting entities - Accounting standard setters and reg. bodies - Independent external auditors - Users of financial statements

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FASB

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Financial Accounting Standards Board Private-sector body comprising of five voting members due-process prodedures as contemplates a reporting issue

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Statements of Financial Accounting Standards

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FASB major pronouncements form - have a title and number

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FASB - Conceptual Framework

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1. Objectives of financial reporting 2. Qualitative charateristics of accounting information - Relevance - Reliability - Comparability 3. Elements of financial statements 4. Recognition and measurement principles

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IFRS

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International Financial Reporting Standards Simular framework to FASB

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Recognition

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Recognized items are dipicted in words and numbers on the face of the financial statmens, with amounts included in the totals. Firm Recognizes revenue when it ships the goods

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Realization

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Refers to converting a noncash item to cash (ie.- collecting an account receivable) Firm Realizes revenue when it collects the cash.

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Cash Basis of Accounting

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Firm measure performance from selling goods / services as it recieves cash from customers Performance measurement does not include cash reciepts from financing activities. Most used for: - computing personal income - firms with medium-term assets / no long-term - professional services who have no investments in inventories

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Accrual Basis of Accounting

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Firm recognizes revenue when a good is sold or renders services and recognizes expenses in the period when the firm recognizes the revenues that the costs helped produce. Attempts to match expenses with associated revenues. Better performance mesurement because it accurately reflects the expenses more closesly match reported revenues. Most used for: - merchandising and manufacturing activities

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Goals contrasted with strategies

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Goal = an ending position Strategy = process of getting from the current position to the goal

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Financing

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optaining resources from: - owners and providing them with a return on and a return of thier investment - creditors and repaying amounts borrowed

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Shareholds, stockholders

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One who owns a share

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Publicly traded

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description of firms whose securities trade in active markets or the securities themselves

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Dividends

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A distribution of assets generatred from earnings to owners of a corporation.

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Creditors

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One who lends

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Investing activities

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Acquiring and selling securities or productive assets expected to produe revenue over several periods.

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Opertating activities

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All transactions and events that are neither financing activities nor investing activities

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Annual report to shareholders

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Report prepared once a year for shareholders: - balance sheet - income sttement - statement of cash flows - audito's report - comments from managment

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Managment's Discussion and Analysis (MD&A)

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A discussion of managment's views of the company's performance; required by the SEC to be included in annual report to shareholders. Items commented: liquidity, operations, segments and effects of inflation.

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Fiscal year

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Period of 12 consecutive months chosen by a buisiness as the accounting period for annual reports, not necessaritly a natural buisness year or calendar year.

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Monetary amount

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Measuring unit

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Shareholder's equity

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Proprietorshiop or owners' equity of a corporation

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Retained earnings

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Net income over the life of a corporation less all dividients. Owner's equity less contributed capital.

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Historical amount

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Aquisition cost; orginal cost; a sunk cost

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Current amount

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Valuation or basis using fair values or market values as of the balance sheet date.

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Capital expenditures

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(outlay) An expenditure to acquire long-term assets.

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Financial reporting process

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Managers and governing boards of reporting entities select from accounting principles provided by standard setters and regulatory bodies and prepare financial statments, which independent external auditors attest to, to enable users of financial statments to make informed decisions.

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Managers

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Buisness executives with decision making authority, who are ganets of the shareholders, and are responsible for safeguarding and propertly using the firm's resources.

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Governing Board

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Board of Directors

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SEC

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Securities and Exchange Commission

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U.S. SEC Registrant

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A firm incorporated based in the US that lists and trades its securitdies in the US.

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Codification project

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Pronouncements by the FASB issued is a compilation of US GAAP

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Conceptual framework

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A coherent system of interrelated objectives and fundamentals, promulgated by the FASB primarily though its SFAC publications; intended to lead to consistent standars for financial accounting and reporting.

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Comparability

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The qualitative characteristic of accounting information that firms record like transactions and events similarly.

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Recognition

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To enter a transaction in the accounts; contract with realize

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Sarbanes-Oxley Act

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(2002) Law in wake of Enron, WorldCom and other scandals. Stiffens the requirments for corporate governance, including accoutin issues. Standards for audit committees of public companies, the certifications managments must sign, and standards of internal control that companies must meet.

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PCAOB

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Public Company Accounting Oversight Board

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IASB

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International Accounting Standards Board

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IFRS

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International Financial Reporting Standards

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Convergence

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The intention of the FASB to eleminate difference betwen US GAAP and IFRS

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Audit opinion

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The auditor's report containing an attestation or lack thereof

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Realization

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Teh accounting practice of delayin the reconition of gains and losses from changes in teh market price of assets until the firm sells the assets.

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Materiality

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Teh concept that should disclose seperately only those events that are relatively importatnt for the business.

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Accounting period convention, reporting period

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The time period between consecutive balance sheets; the time period for which the firm prepares financial statements that measure flows, such as the income statement and the statement of chas flows.

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Natural business year

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A 12-month period chosen as the reporting period so that the end of the period coincides with a low point in activitiy or inventories.

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Matching convention

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The concept of recognizing cost expirations in the same accounting period during which the firm recognizes relted revenues; combining or simultaneously recognizing the revenues and expenses that jointly result fro the same transactions.

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Who Prepares a firm's financial statements?

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Management, under the oversight of the firm's govering board.

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In what sense are a firm's accounts receivable a source of financing for that firm's customers?

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Accounts recievable represent amounts owed by customers for goods and services they have already recieved. Customer has the benefit of the goods before it pays cash.

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When is a firm's fiscal year differ from a calandar year?

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Calandar year ends on December 31. Fiscal year ends on a date that is determined by the firm, based on its buisness model.

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Reporting items on firm's balance sheet: Historical amounts or Current amounts

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Historical amounts - reflect the the amount at which items entered the firm's balance sheet; the aquisition cost of inventory. Current amounts - reflect values at the balance sheet date; so they reflect current economic conditions. Historical is amount paid to obtain the inventory and current is the amount for what it can be sold for today.

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Two successive balance sheets for: Income Statement Statement of Cash Flows

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Income statment - connects two successive balance sheets through effect on retained erarnings Net Income that is not paid to shareholders as dividends increased retained earnings. Statement of Cash Flow - connects two successive balance sheets because it explains the change in cash from operationg, financing, and investing activities.

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Balance Sheet Relations

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+ Current Assets + Noncurrent Assets = + Current Liabilities + Noncurrent Liabilities + Share-holders Equity`

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Retained Earnings Relations

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+ Retained Earnings + Net Income - Dividends Declared = +Retained Earnings

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Cash Flow Relations

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+ Cash at Beginning + Cash Flow from Operations + Cash Flow from Investing + Cash Flow from Financing = +Cash at End

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Balance Sheet

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Assets Cash Accounts Receivable Inventories Other Current Assets Total Current Assets Property, Plant and Equiopment Other Noncurrent Assets Total Assets Liabilities and Shareholder Equity Accounts Payable Current Long Term Debt Other Current Liabilities Total Current Liabilities Long Term Debt Other Noncurrent Liabilities Total Liabilities Common Stock Retained Earnings Total Shareholders' Equity Total Liabilities and Shareholders Equity

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Income Statement

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Sales Salaries and Benefits Expense Expenses Other Operationg Expenses Interest Expense Interest Income Net Income

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