100
Fall !"#"$$%
AIS 2011
BRIAN COPSEY
WELCOME to AIS 100!
2
!
!
Name Tent- leave on front desk end of class
Note Card (to be used for cold-calling)
! Name
! Major/Year
! Hometown
! 2
!
Goals for semester
Seating chart will be passed around next week
Agenda
3
Introductions
Syllabus
! WileyPLUS
! What is accounting and why is it important?
!
!
! Goldman
Sachs 10-k
Chapter 1 Discussion
! IFRS Slides
!
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Introductions & Administrative Issues
4
!
!
Introductions
! Name/Major/Year
! Where are you from?
! Summer recap
Syllabus
! Contract for the class
! Textbook
! Class Structure and Required Preparation
"
!
Assignments (Graded, Non-graded, Discussion)
Assignment for next class: Read syllabus thoroughly
and come to class with any questions you may have
Administrative Issues (continued)
5
!
WileyPLUS
! Unique URL sent in email
! Registration code KEEP!
! Brief overview of WileyPLUS
" Announcements
Section
Section (Syllabus, Powerpoints, etc.)
" Assignments
" Gradebook
" Documents
! Technical
Issues with website & homework
deadlines
Why Accounting?
6
!
What is accounting and why is it important?
! Accounting: the information system that
identifies, records and communicates the
economic events of an organization to
interested users (Chapter 1)
! Group discussion why is accounting
important?
! 1 minute exercise: What does accounting
mean to you?
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Goldman Sachs Form 10-k
7
What types of information is being conveyed
and what is the general format?
! Who might be interested in this information
and for what reasons?
! Any surprises?
!
CHAPTER 1
INTRODUCTION TO
FINANCIAL STATEMENTS
9
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Forms of Business Organization
Sole Proprietorship
10
!
!
Definition: A business owned by one person
Example: A small owner-operated barber shop
Forms of Business Organization
Partnership
11
!
!
!
Definition: A business owned by two or more persons
associated as partners
Often formed because an individual lacks sufficient
economic resources to initiate or expand the business
Example: Professional practices such as lawyers, architects or
CPAs
Forms of Business Organization
12
Corporation
!
!
Definition: A business organized as a separate legal entity
owned by stockholders
Investors in a corporation receive shares of stock to indicate
their ownership claim
!
!
Dont need large sums of money to become stockholder
Example: Companies listed on the New York Stock Exchange
(NYSE) such as Tootsie Roll
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Forms of Business Organization
13
Other Factors
Taxes
Legal Liability
! Sole Proprietorships and Partnerships far more
common than Corporations
!
!
! However,
corporations are focus of the text as the
majority of U.S. business is transacted by
corporations
Problem 1
Forms of Business Organization
14
In choosing e organizaonal form for your outdoor guide service,
you should consider e pros and cons of each.
Iden each of e foowing organizaonal characriscs wi e
organizaonal form or forms wi which it is associad:
1.
Easier raise nds
Corporaon
2.
Simple establish
SP and Partnership
3.
No personal legal liabili
Corporaon
4.
Tax advantages
SP and Partnership
5.
Easier ansfer ownership
Corporaon
15
Users and Uses of Financial
Information
Accounting: the information system that
identifies, records and communicates the
economic events of an organization to
interested users
! Users: divided into 2 groups
1. Internal Users
2. External Users
!
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Internal Users
16
Internal Users: managers who plan, organize
and run a business
! Examples
!
! Marketing
Managers
Supervisors
! Finance Directors
! Company Officers
! Production
External Users
17
!
!
!
Investors: use accounting information to make
decisions to buy, hold or sell stock
Creditors: use accounting information to evaluate
the risks of selling on credit or lending money
Examples
! Taxing
authorities
! Customers
! Labor
Unions
Agencies
! Regulatory
Problem 2
Users and Uses of Financial Information
18
Which statement about users of accounting
information is incorrect:
1)Taxing authorities are considered external users
2)Regulatory authorities are considered internal
users
3)Present creditors are considered external users
4)Management is considered an internal user
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Problem 2 Answer
Users and Uses of Financial Information
19
Which statement about users of accounting
information is incorrect:
1) Taxing authorities are considered external
users
2) Regulatory authorities are considered
internal users
3) Present creditors are considered external
users
4) Management is considered an internal user
Users of Financial Information
20
!
Sole Proprietorship and
Partnership
!
Internal Users
"
"
!
"
"
"
"
"
!
!
Corporation
!
Partners
Employees
External Users
"
!
Creditors/Lenders
Private Investors
Vendors
Customers
Taxing authorities
Regulators
Same as Sole Proprietorship
and Partnership, PLUS
"
"
!
!
Public Investors
Generally, more interest from
regulators
Publicly traded
Regulated by SEC
Not publicly traded
Not regulated by the
Securities and Exchange
Commission (SEC)
Users of Financial Information
21
Why does the form of organization matter for accounting?
Public investors make investments in publicly traded
corporations though capital markets, and therefore
have more difficulty requesting information from
management.
Conversely, users of financial information from sole
proprietorships, partnerships, and privately held
corporations can more easily request financial
information directly from owners and managers.
Therefore, the accounting rules and regulations differ for
public vs. private companies. Only corporations can be
publicly held.
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Ethics in Financial Reporting
22
Regulators and lawmakers concerned that the
economy would suffer if investors lost
confidence in corporate accounting due to
unethical financial reporting
Ethics in Financial Reporting (cont.)
23
Judgment in Financial Reporting
Rules and Principles related to Recognition
Management estimates in Measurement
Management Incentives can lead to unethical
decisions
Why do we need Regulation?
Fosters confidence in capital markets
Arthur Andersen, Enron, and WorldCom #
Sarbanes Oxley act of 2002 (PCAOB)
Problem 3
Users and Uses of Financial Information
24
Which of the following did NOT result from the
Sarbanes-Oxley Act
1)Independence of auditors increased
2)Penalties for fraudulent activity increased
3)Tax rates on corporations increased
4)Top management must now certify the
accuracy of financial information
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Problem 3 Answer
Users and Uses of Financial Information
25
Which of the following did NOT result from the
Sarbanes-Oxley Act
1) Independence of auditors increased
2) Penalties for fraudulent activity increased
3) Tax rates on corporations increased
4) Top management must now certify the
accuracy of financial information
Business Activities
26
All businesses are involved in 3 types of
activity, which the accounting information
systems keeps track of
1. Financing
2. Investing
3. Operating
!
Financing Activities
27
Borrow Money
!
Take out a loan from bank
!
Issue (sell) shares of stock
Issue debt securities (bonds)
!
!
!
Creditors: persons or entities
to whom a company owes
money
Liabilities: amounts owed to
creditors
Specify a payment schedule
!
!
!
!
Common stock: total amount
paid in by stockholders for the
shares they purchase
No legal right to corporate
cash until claims of creditors
are satisfied
Dividends: payments to
stockholders
Legal right to be paid
according to pre-determined
schedule
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Investing Activities
28
Involves the purchase of resources a
company needs in order to operate
! Assets: resources owned by a business
!
! E.g.
Property, Plant and Equipment,
Investments, Cash
Operating Activities
29
!
!
Usually involves assets with
shorter lives (longer-lived
assets usually purchased
through investing activities)
Revenue: the increase in
assets resulting from the sale
of a product or service in the
normal course of business
!
!
!
!
Expenses: the costs of assets
consumed or services used in
the process of generating
revenues
!
"
"
"
E.g. when Toyota sells a car
Inventory: goods (assets)
available for future sales to
customers
Account Receivable: right to
receive money in the future
Examples:
"
!
Cost of goods sold
Selling expenses
Marketing expenses
Administrative expenses
Liabilities may also arise from
expenses
!
Accounts Payable: obligations
to pay for goods/services
purchased on credit
Net Income = Revenues > Expenses
Net Loss = Expenses > Revenues
Relevance of Business Activities
30
!
Why are business activities relevant in
accounting?
! Predicting
future earnings and cash flows
business activities (operating) are
expected to produce consistent cash flows in
future years
! Investing cash flows can signal the potential for
increases in future earnings and cash flows
! Financing activities themselves do not result in
future earnings or cash flows
! Certain
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A Look Ahead: Problem 4
Business Activities
31
Which of the following is an example of a
financing activity?
Buying delivery equipment
Selling goods on account
3.Issuing shares of common stock
4.Buying inventory
1.
2.
A Look Ahead: Problem 4 Answer
Business Activities
32
Which of the following is an example of a
financing activity?
1.
2.
3.
4.
Buying delivery equipment
Selling goods on account
Issuing shares of common stock
Buying inventory
Communication with Users
33
!
1.
2.
3.
4.
Assets, liabilities, expenses and revenues are
presented in 4 different financial statements
Income statement
Retained Earnings statement
Balance Sheet
Statement of Cash Flows
**Prepared in this order due to the
interrelationship between the statements**
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Income Statement
34
!
Reports the successes or failures of the
companys operations for a period of time
! For
!
period ended.
Investors and creditors are interested in a
companys past net income - provides useful
information for predicting future net income
! Relates
to a companys stock price
creditors determine if company has ability
to repay in the future
! Helps
Net income of $1,000,000
Income Statement Example
income statement: total sales-total
expenses
35
Retained Earnings Statement
36
!
Shows the amounts and causes of changes in
retained earnings during the period
! For
period ended.
retained earning statement comes
after the income statement
helps management determine if a
dividend is reasonable
Retained earnings: the net income retained
in the corporation
! Users able to evaluate the dividend payment
practices
!
! Investors
may prefer high or low dividend payouts
take notice because dividends reduce
ability to repay debts
! Creditors
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37
Retained Earnings Statement
Example
DONT FORGET: for the month ended
Note: If a company has a net loss, it deducts (rather than adds) that amount
Balance Sheet
38
Reports assets and claims to assets at a
specific point in time
! Claims to assets are subdivided into 2
categories
!
1.
2.
Liabilities (claims of creditors)
Claims of owners (stockholders equity)
Basic Accounting Equation
Balance sheet is the snapshot
looking at one specific time
looking at assets (what the company
owns), liabilities (claims of creditors)
THIS EQUATION ALWAYS
BALANCES
Assets = Liabilities + Stockholders Equity
Balance Sheet Example
39
Note: As of specific date
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Statement of Cash Flows
40
!
Provide financial information about the cash receipts
and cash payments of a business for a specific
period of time
!
!
!
For period ended
did it come from operating or
finacing activitis?
what caused the change in cash
balance
Reports cash effects of a companys operating,
investing and financing activities as well as net
increase or decrease in cash during the period
Answers:
Where did cash come from during the period?
How was cash used during the period?
! What was the change in the cash balance during the
period?
!
!
Statement of Cash Flows Example
41
Interrelationships of Statements
42
Note: All final sums are doubleunderlined
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Interrelationships of statements
43
!
Why do we need so many financial statements?
! Each
statement communicates different
information to users
Another Look Ahead: Problem 5
Communication with Users
44
What kind of classification is Cost of Goods
Sold?
EXPENSE
inventory cost (raw of what it costs the
c ompany to produce)
Revenue
Expense
3.Liability
4.Asset
1.
2.
Another Look Ahead: Problem 5 Answer
Communication with Users
45
What kind of classification is Cost of Goods
Sold?
1.
2.
3.
4.
Revenue
Expense
Liability
Asset
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Basic Accounting: Problem 6
Communication with Users
46
Saira's Maid Service began the year with total
assets of $120,000 and stockholders' equity of
$40,000. During the year the company earned
$90,000 in net income and paid $20,000 in
dividends. Total assets at the end of the year were
$215,000. How much was stockholders' equity at
the end of the year?
$130,000
$110,000
3.$150,000
4.$135,000
1.
2.
Basic Accounting: Problem 6 Answer
Communication with Users
47
Saira's Maid Service began the year with total
assets of $120,000 and stockholders' equity of
$40,000. During the year the company earned
$90,000 in net income and paid $20,000 in
dividends. Total assets at the end of the year were
$215,000. How much was stockholders' equity at
the end of the year?
1.
2.
3.
4.
$130,000
$110,000
$150,000
$135,000
Pop Quiz: Problem 7
Communication with Users
48
In which of the following sequences are the financial
statements usually prepared?
Balance sheet, statement of cash flows, income
statement and retained earnings statement
2.Income statement, balance sheet, retained
earnings statement and statement of cash flows
3.Balance sheet, retained earnings statement,
statement of cash flows and income statement
4.Income statement, retained earnings statement,
balance sheet and statement of cash flows
1.
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Pop Quiz: Problem 7 Answer
Communication with Users
49
In which of the following sequences are the financial
statements usually prepared?
1.
2.
3.
4.
Balance sheet, statement of cash flows, income
statement and retained earnings statement
Income statement, balance sheet, retained
earnings statement and statement of cash flows
Balance sheet, retained earnings statement,
statement of cash flows and income statement
Income statement, retained earnings
statement, balance sheet and statement of
cash flows
Yet Another Look Ahead: Problem 8
Communication with Users
50
Which section of a cash flow statement shows
the cash spent on new equipment during the
past accounting period?
Investing
s ection
The cash flow statement does not give this
information
2.The investing section
3.The financing section
4.The operating section
1.
Yet Another Look Ahead: Problem 8 Answer
Communication with Users
51
Which section of a cash flow statement shows
the cash spent on new equipment during the
past accounting period?
1.
2.
3.
4.
The cash flow statement does not give this
information
The investing section
The financing section
The operating section
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More Basic Accounting: Problem 9
Communication with Users
52
If total liabilities decreased by $15,000 and
stockholders equity increased by $5,000 during a
period of time, then total assets must change by
what amount and direction during that same period?
$20,000 increase
$10,000 decrease
3.$10,000 increase
4.$15,000 decrease
1.
2.
More Basic Accounting: Problem 9 Answer
Communication with Users
53
If total liabilities decreased by $15,000 and
stockholders equity increased by $5,000 during a
period of time, then total assets must change by
what amount and direction during that same period?
1.
2.
3.
4.
$20,000 increase
$10,000 decrease
$10,000 increase
$15,000 decrease
Fun With Balance Sheets: Problem 10
Communication with Users
54
The balance sheet
1. presents the revenues and expenses for a
specific period of time.
2. reports the assets, liabilities and stockholders
equity at a specific date
3. summarizes the changes in total equity for a
specific period of time
4. reports the changes in assets, liabilities and
stockholders equity over a period of time
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Fun With Balance Sheets: Problem 10 Answer
Communication with Users
55
The balance sheet
1. presents the revenues and expenses for a
specific period of time.
2. reports the assets, liabilities and
stockholders equity at a specific date
3. summarizes the changes in total equity for a
specific period of time
4. reports the changes in assets, liabilities and
stockholders equity over a period of time
Annual Report
56
U.S. companies that are publicly traded must
provide its shareholders with an annual report
! What is included:
!
! The
financial statements previously discussed
Discussion & Analysis
! Notes to the Financial Statements
! Independent Auditors Report
! Management
57
Management Discussion &
Analysis (MD&A)
Includes companys:
! ability to pay near-term obligations;
! ability to fund operations and expansion; and
! its results of operations
Involves several subjective estimates and
opinions
most of the time its the dialougue of
the company explaining new trends
and giving investors expectations of
new periods
a future statement that invstors look
at and evaluate
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Notes to the Financial Statements
58
allows users to see how certain
numbers are calculated
Clarify the financial statements and provide
additional detail
! Information is not necessarily quantifiable
!
! Often
includes descriptions of accounting policies
and methods utilized to prepare the statements
!
The notes are an integral part of the financial
statements
Auditors Report
59
!
!
!
!
The report is prepared by an independent outside
auditor (PwC, E&Y, etc)
States the auditors opinion as to the fairness of the
presentation of the financial position and results of
operations and their conformance with generally
accepted accounting principles (GAAP)
Only accountants who meet certain criteria and attain
their CPA requirements may perform audits
Unqualified opinion: issued when the auditor is
satisfied that the financial statements provide a fair
representation of the companys financial position and
results of operations are in accordance with GAAP
publically traded companies have
anual financial files that are required to
be audited
GAAP has specific rules and
regulations in making reports
Annual Report Revisited
60
!
Why do we need so many components in the
Annual Report?
! Not
all relevant information can be picked up in
the financial statements
! Users are interested in non-financial information
as well as financial information
! Other reasons?
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Annual Report Example
61
!
Apple Inc 2010 10-K
! (Note:
A 10-K is the form that public companies
file with the SEC that contains the Annual Report)
http://investor.apple.com/sec.cfm
! Select
Annual in the Groupings Filter
Communication with Users
62
Problem 11
The notes to the financial
statements are not
required if a company
presents all 4 financial
statements
True
False
!
!
Problem 12
Which section of the annual
report presents highlights of
favorable or unfavorable trends
and identifies significant events
and uncertainties affecting a
companys ability to pay nearterm obligations, and a
companys ability to fund
operations and expansion?
Financial statements
Auditor's report
Management discussion and
analysis
4.Notes to the financial
statements
1.
2.
3.
Communication with Users
63
Problem 11
Problem 12
The notes to the financial
statements are not
required if a company
presents all 4 financial
statements
Which section of the annual
report presents highlights of
favorable or unfavorable trends
and identifies significant events
and uncertainties affecting a
companys ability to pay nearterm obligations, and a
companys ability to fund
operations and expansion?
!
True
!
False
1.
2.
3.
4.
Financial statements
Auditor's report
Management discussion
and analysis
Notes to the financial
statements
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Accounting: The Bigger Picture
64
!
Broadly, what is Accounting?
! How
companies communicate financial information
(to various user groups)
!
Key questions in the general framework of this
communication
! Who
are the users? What are their needs?
should companies recognize in financial
statements? (i.e. What should they include)
! How should measure the items in their financial
statements?
! What impact will financial statement information have
on users?
! What
65
General Framework for Viewing
Accounting
Users
Users attempting to
predict:
Investment Return
Future cash flows
Liquidity
Solvency
Profitability
Recognize
Criteria for
Recognition
Measure
Alternative ways
to measure:
Cost
Market value
Replacement cost
Depreciation
Impact on
Users
Decision Usefulness
preciseness of
measure vs. accuracy
vs. subjectivity
international financial reporting
s tandards
currently used by over 120 countries
worlwide--big push for one accounting
s tandard worldwide
USA uses GAAP but not beneficial
because a lot of companies are global
if there were just one standard make it
a lot easier
investors value comparability--hard to
c ompare with different financial
s tatements
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Difficult to compare global markets
Capital markets are increasing interconnectedness of
users and companies across countries
Companies raising capital outside home market
Investors invest in companies outside of their home
country
As a result, capital market participants need high quality
and comparable financial information to use in the decision
making process.
Role of International Accounting Standards
Over 115 countries permit or require the use of IFRS for all domestic
listed companies (EU require IFRS for listed companies starting 2005)
Since 2002, the IASB and the FASB have been working on
converging IFRS and U.S. GAAP
Major milestones in convergence of IFRS and U.S. GAAP
Norwalk Agreement (2002)
has been a lot of movement towards
c onvergence
IFRS and GAAP converging are beneficial
to all segments of business
SEC removed requirement for non U.S. companies registered in
the U.S. to reconcile their financial reports with U.S. GAAP if
financial reports complied with IFRS (2007)
IASB and FASB accelerate joint projects for completion in
mid-2011 in anticipation of adoption of IFRS by ~ 2014 (2008)
IASB and FASB extend timeline for completion of their major joint
projects to the second half of 2011 (2011)
Because there is still uncertainty surrounding whether
adoption of IFRS by U.S. public companies will occur, it
is important that students learn the underlying
concepts for IFRS and that students are provided with
activities that apply these concepts in various settings
and environments.
This will provide students with a basic understanding
of IFRS.
IFRS A Look at IFRS at the end of each chapter
Current events related to adoption of IFRS
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A Look at IFRS (Chapter 1)
71
Many agree that there is a need for one set of
international accounting standards due to
! Multinational corporations
! Mergers and acquisitions
! Information technology
! Financial markets
IFRS has a similar conceptual framework to U.S.
GAAP
A Look at IFRS (Chapter 1)
72
IFRS
!
!
!
Principles based
Developed by the
International
Accounting Standards
Board (IASB)
Non U.S.
companies do not
have to comply with
SOX
U.S. GAAP
!
!
!
Rules based
Developed by the
Financial Accounting
Standards Board
(FASB)
SOX applies to large
public companies on
U.S. exchanges
GAAP uses very rigid rules in how
everything needs to be recorded
IFRS is said to be principles based-therefor it is more open to discretion
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Problem 13
A Look at IFRS
73
Which of the following may be a reason for the
U.S. to NOT adopt IFRS
1.The global financial market place
2.Increase in multinational corporations
3.Information technology capabilities
4.GAAP is considered to be superior to IFRS in
the US marketplace
Problem 13
A Look at IFRS
74
Which of the following may be a reason for the
U.S. to NOT adopt IFRS
1. The global financial market place
2. Increase in multinational corporations
3. Information technology capabilities
4. GAAP is considered to be superior to IFRS
in the US marketplace
Problem 14
A Look at IFRS
75
The most common description of IFRS as
contrasted to GAAP is that:
1.GAAP is principles based and IFRS is rules
based.
2.GAAP is rules based and IFRS is rules based.
3.GAAP is rules based and IFRS is principles
based.
4.GAAP is principles based and IFRS is concepts
based.
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Problem 14
A Look at IFRS
76
The most common description of IFRS as
contrasted to GAAP is that:
1. GAAP is principles based and IFRS is rules
based.
2. GAAP is rules based and IFRS is rules
based.
3. GAAP is rules based and IFRS is
principles based.
4. GAAP is principles based and IFRS is
concepts based.
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