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Financial Accounting 2.8.11

Financial Accounting 2.8.11 - Fourth Lecture Spring 2011...

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Fourth Lecture Spring 2011 Lecture Notes for Chapter 3 2/8/11 and 2/10/11 Chapters 1 and 2 provided an overview of the need for accounting information, the accounting cycle, the mechanics of journal accounts and ledger posting (T-accounts), and construction of the basic financial statements. Chapter 3 begins an analysis of the balance sheet accounts and the judgments required under USGAAP and IFRS related to the balance sheet (B/S). The Chapter focuses on the following basic questions: 1) Are all economic assets and liabilities recorded on the B/S? No they’re not. There are some liabilities and assets that don’t get recorded on the balance sheet 2) What attributes must economic assets or liabilities possess to be recognized (recorded)? If something is recognized it is recorded, it is included. If something is not recognized, it is not recorded in the balance sheet. 3) How is the amount of that asset or liability measured? 4) What does the balance sheet structure tell us about how the management of the company has chosen to finance assets? How is management’s financing choice (debt vs. equity) related to the nature of the industry in which the company operates? 5) What are some of the methods we can use to answer the question asked in #4? We’re going to introduce ratio analyses (you have a balance sheet, it’s a given, what does that balance sheet tell you? There are ratios that balance sheet gives that are important to investors for making financial decisions)
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ASSET 1. company owns or controls use of the item 2. right to use item comes from past transaction or exchange (intention to buy something does not count; no executory contracts or simple exchange of promises) - just the fact of ordering does not result in a transaction. - if I ordered 3 items from a vendor, that is not a transaction 3. future benefit can be measured with sufficient reliability . - some things that are relevant may not be reliable so will not be recorded #3 leaves out a lot of intangible assets b/c benefits cannot be measured reliably: internally developed customer lists, brand names, trademarks, expertise of employees, etc. If these items are purchased from another company, most can be recorded as assets because there is a purchase price. (sufficient reliability) Ask yourself, would you say that brand names such as Coke, Pepsi, Mickey Mouse, have value? Yes! But how valuable are they? Can we measure their value with sufficient reliability? We would have to sell them to measure sufficient reliability. The value of the asset bought by the company that buys this asset gets to record this asset on the balance sheet (for example brand name), and the first company that sells get to record the cash received on balance sheet. However, the asset would be reduced in value over time. Company 2 would have to reduce the value recorded overtime. Until a company sells this trademark, patent, etc. it does not get recorded as an asset.
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