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MACC7012 - Financial Accounting TheoryMaster of AccountingTopic 1. Introduction; Role of AccountingGuochang Zhang © 2022The University of Hong Kong
Topic 1. Introduction1.1. Fundamental role of accounting1.2. Features of accounting and reporting1.3. Decision usefulness of information: a conceptualillustrationAppendices:-Appendix 1. historical perspective of accounting development-Appendix 2. the crisis-regulation cycleFinancial Accounting TheoryProfessor Guochang Zhang, HKU2
1.1 Fundamental Role of AccountingAccounting is a vital tool to serve economic activities.From an economic standpoint:-The most important task isto create value(and economicgrowth)-The 2ndmost important task isto allocate / distribute valueamong stakeholdersNote: how we allocate value can affect value creationExamples:How we pay employees and managers of a company determineswhether they will work hard to increase firm valueIf a loan contract does not protect the interest of a lender, the lendermay refuse to lend money to fund a firm’s operation.Financial Accounting TheoryProfessor Guochang Zhang, HKU3
1.1 Fundamental Role of AccountingEconomic agents act to advance their own well-beings (utility):-Investors seek to increase wealth-Firms seek to make profitFrom microeconomics theory, individuals are better off when theyhave more wealth.A central theme of the course is (economic)value.Financial Accounting TheoryProfessor Guochang Zhang, HKU4
A simple economyTwo sectors of an economy:Øthe real economic sector: firms makerealinvestmentØfinancial markets: investors and lenders supply capitalThe real sector is the foundation for the activities in the financial sectorFinancialmarketsFirm 1Firms make real investmentdecisionsInvestors and lenders makefinancial investment decisionsFirm 2Firm JReal SectorInformationCapitalFinancial reporting connectsthe real and financial sectorsFinancial Accounting TheoryProfessor Guochang Zhang, HKU5
6Firm Performance (profit; valueGovernance(compensation)ProjectselectionFinancing(investors;creditors)Accounting InformationAccounting Information serves many purposesFigure adapted from Bushman and Smith (2001)Financial Accounting TheoryProfessor Guochang Zhang, HKU
Many uses of accounting informationAccounting information is used in economic decisionsReal investment:Every business organization faces capital investment decisions:Which investment projects to acceptWhether to locate its businessHow to allocate resources among divisions, product lines, etc.Example:Tesla (TSLA) has updated its capital expenditure guidance to confirm aplan to invest up to $12 billion on its new electric car and battery factories in just twoyears. It marks an acceleration of the automaker’s spending in order to increase EVproduction capacity. Tesla explains that the money will go deploying new productioncapacity at several factories under construction and in development (Electrek, 26thOct2020)-these decisions would require accounting information. (how?)Financial Accounting TheoryProfessor Guochang Zhang, HKU7

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Term
Spring
Professor
N/A
Tags
Economics, Balance Sheet, Generally Accepted Accounting Principles, International Financial Reporting Standards, Professor Guochang Zhang

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