Chapter 1 handout - Lecture Notes for Chapter 1 Environment...

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Financial Accounting: The Impact on Decision Makers
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Chapter 13 / Exercise 2
Financial Accounting: The Impact on Decision Makers
Norton/Porter
Expert Verified
Lecture Notes for Chapter 1 Environment and Structure of Financial Accounting Accounting: The process of identifying , measuring and communicating economic (financial) information about an organization to interested parties. Financial Accounting: The process of identifying, measuring and communicating economic (financial) information about a company , primarily to investors and creditors (existing or potential). - deals with publicly traded companies. - Information is processed primarily for investors and creditors. Managerial accounting reports detailed information to internal users (managers). 1
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Financial Accounting: The Impact on Decision Makers
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Chapter 13 / Exercise 2
Financial Accounting: The Impact on Decision Makers
Norton/Porter
Expert Verified
Means of conveying information to investors: Relevant financial information is provided primarily through financial statements and related disclosure notes. Balance Sheet (Statement of Financial Position) Income Statement (Statement of Earnings / Statement of Operations) Statement of Cash Flows Statement of Shareholders’ Equity The notes to these financial statements. Starting in 2012, companies must either provide a Statement of Other Comprehensive Income immediately following the Income Statement, or present a Combined Statement of Comprehensive Income that includes the information normally contained in both the Income Statement and the Statement of Other Comprehensive Income. [There are other means such as press releases, websites, proxy statements and other required filings, and direct communication with lenders and investors, but in this course we will focus only on information presented in the financial statements and the notes to these financial statements.] Information Needs of Investors and Creditors 1. Investors look for two sources of possible cash flow: Periodic dividend distributions from the corporation. The ultimate sale of the ownership shares of stock. Example 1 : An investor purchased 100 shares of Growmore Inc for $10,000 in 2009. At the end of 2009 the investors received $500 dividends from Growmore, and the investor sold the 100 shares during 2010 for $12,000. 2. Creditors lend money to a company for a specific length of time. They hope to gain by charging interest on the money they lend. Example 2: A bank lent $10,000 to Bad Idea Company for one year at an interest rate of 15%. How does an investor choose between alternatives? 1. Identify the expected rate of return on various projects. 2. Identify the uncertainty or risk of the expected return. Suppose and individual can lend money to Bad Idea Co. at terms given in Example 2 or can invest in a US Treasury bond which pays 5 percent return per year with the principal and interest being federally insured. Which option would he/she choose? 2
The objective of financial accounting is to provide investors and creditors with information useful for evaluating the amounts , timing , and uncertainty of a company’s future cash flows.

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