chapter 1 financial 3rd ed
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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 Frameworkfor FinancialAccounting
Chapter 1
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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
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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
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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
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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
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Accounting Information
• Managerial accounting: information provided for internal users
• Financial accounting: information provided for external users
Internal users
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Primary Functions of Financial Accounting
• Measure business activities• Communicate measurements for decision making
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Illustration 1.2—Framework forFinancial 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
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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
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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
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Basic Accounting Equation
• Explains resources and their claims
Revenues – Expenses = Net income (loss)
• Dividends: distributions to owners
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Business Activities andTheir 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
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• Primary financial statements• Income statement• Statement of stockholders’ equity• Balance sheet• Statement of cash flows
Communicating Through Financial Statements
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Income Statement
• Reports the company’s revenues and expenses over an interval of time
• Shows whether revenues were enough to cover expenses
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Illustration 1.5—Income Statement
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Statement of Stockholders’ Equity
Stockholders’ Equity
= Common Stock + Retained Earnings
Summarizes the changes in stockholders’ equity over an interval of time
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Illustration 1.6—Statement of Stockholders’ Equity
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Balance Sheet
Assets = Liabilities + Stockholders’ Equity
Presents the financial position of the company on a particular date
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Illustration 1.7—Balance Sheet
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Statement of Cash Flows
Measures activities involving cash receipts and cash payments over an interval of time
Can be classified into three categories
Operatingcash flows
Investingcash flows
Financingcash flows
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Illustration 1.8—Statement of Cash Flows
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Illustration 1.9—Links among FinancialStatements
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Learning Objective 4
Describe the role that financial accounting plays in the decision-making process
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Illustration 1.10—Use of Financial Accounting Information in Investing and Lending
Decisions
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Part B
Financial Accounting Information
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Learning Objective 5
Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in
financial accounting
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Rules of Financial Accounting
Investors & Creditors
Financial Accounting Information
Generally Accepted Accounting Principles (GAAP)
Generally Accepted Accounting Principles (GAAP)
make their decisions based on
Should be based on formal standards
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Current Standard Setting
United States Global
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)
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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.
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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
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Part C
Careers in Accounting
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Learning Objective 6
Identify career opportunities in accounting
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Illustration 1.14—Some Career Options
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Illustration 1.14—Some Career Options
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Learning Objective 7
Explain the nature of the conceptual framework used to develop generally accepted accounting
principles
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Conceptual FrameworkAppendix
• Qualitative characteristics• Enhancing qualitative characteristics• Cost effectiveness constraint• Underlying assumptions
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Illustration 1.15—Qualitative Characteristics of Useful Financial Information
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Cost Effectiveness Constraint
• Cost constraint suggests that: • Financial accounting information is provided only
when the benefits of doing so exceed the costs
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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
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End of Chapter 1
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