MGT220 - Financial Accounting II

Financial Statements & Financial Reporting Accounting Essential Characteristics Identifying, measuring, communicating financial info It is about economic entities It is to interested persons Financial Accounting (reporting) – Culminates in preparation of financial reports that cover the enterprises’ business activities to be used by internal and external parties. Users include investors, creditors, etc. Managerial Accounting – Identifies, measures, analyzes, and communicates financial info to in

Conceptual Framework A coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, and limits of financial accounting and financial statements. Objective of Conceptual Framework Create standards that build on an established body concepts and objectives. Provide a framework for solving new and emerging practical problems. Increase financial statement users’ understanding of and confidence in financial reporting. Enh

Accounting Information System System for collecting and processing transaction data to make financial info available to parties. Basic Terminology & Double Entry Rules Event – Exchange of money for something. Including an external event or transaction. Account – Including permanent and temporary. Ledger – Document with account balances. Includes general and subsidiary. Posting – Transferring journal entries to ledger. Trial Balance – Document that verifies Debit = Credit Includes adjusted trial

Business Model and Industries The basic business model: getting cash, investing it in resources, and then using those resources to generate profits. The model can be broken down into 3 activities Financing - Obtaining cash funding Borrowing, issuing shares, or (in established firms) through retained earnings. Financing also involves the repayment of debt and/or repurchase of shares Investing - Using the funding to purchase long-term investments, and the selling of those investments. Operating -

Analyzing a Statement of Financial Position Provides info about a company’s liquidity and solvency to assess the risk of investing in the company. It also provides data on financial structured → like if it is heavily financed by debt and equity. Investors use the SFP and related notes to assess financial flexibility and risk of failure. Assessing Earnings Quality Users use statement of cash flows to assess earnings quality. Management may use accounting trickery to manipulate numbers for bonuse

Economics of Sales Transactions Fundamentals of Understanding Sales Transactions Sales of goods and services are different. Goods Tangible assets, with a definite point in time (possibly spanning periods) when control over the goods or the item being sold passes to the buyer. Doesn’t mean that the entity has access to the benefits provided by the asset where others do not. Normally this coincides with the transfer of risks/rewards as indicated by possession and legal title. Services → Intangib

Cash and Receivables Understand cash and accounts receivable from a business perspective. How do Companies Manage and Control Cash? Businesses rely on cash flow budgets to help anticipate cash needs and minimize borrowing requirements. Without surplus cash, businesses must carefully manage its cash resources. Includes implementing internal control over physical custody of cash on hand and preparation of bank reconciliations. What types of Companies have Extensive AR? Manufacturers and wholesale

Inventory Understand inventory from a business perspective. What Types of Companies Have Inventory? Manufacturing, retail, and wholesale often have significant amount of inventories. Some companies produce “just-in-time.” Inventory Categories Merchandise Inventory – Unsold units left on hand for retailers and wholesalers. Manufacturers have 3 accounts: Raw Materials Inventory – Costs for goods/materials on hand byt not yet in production. Work-in-Process – Costs of raw material on which producti

Understanding Investments Types of Investments Investments serve 1 of 2 reasons: To have capital appreciate. To earn dividends and/or income. Debt Instruments – Companies that invest are creditors of the issuing company. Debt Securities – Prices are normally quoted in an active market, such as government investments, corporate bonds, convertible debt. High contractual requirements regarding payment of principal and interest. Cash is paid upfront and receives the rights to receive interest and re

Objective 1 - Identify the business importance and characteristics of property, plant, and equipment and explain the recognition criteria. PP&E - Business Perspective All enterprises invest in long-lived assets: physical (Property, plant, and equipment), and not physical (patents). Important for producing goods and providing services. To assess an enterprise’s potential for future cash flows, users need: A solid understanding of the enterprise’s investment in long-term productive assets. The ex

Objective 1 – Understand the importance of depreciation, impairment, and disposition from a business perspective. The Importance of Depreciation, Impairment, and Disposition Allocate the cost of PP&E over its useful life to match costs and benefits to revenues they help generate. Ensures assets are carried at the right amount that is recoverable – companies regularly assess PP&E for signs of impairment. Depreciation – A Method of Allocation Depreciation – Amortization of allocation of depreciab

Objective 1 – Understand the importance of goodwill and intangible assets from a business perspective and describe their characteristics. The Business Importance and Characteristics of Goodwill and Intangible Assets Intangible assets are difficult to identify and measure – but are a key focus of many companies and standard setters. Characteristics of Goodwill Goodwill – An asset representing future economic benefits arising from other assets acquired in a business combination that are not indiv