Ch07_Wey_Fin_6e

Ch07_Wey_Fin_6e - Chapter 7 Chapter Accounting Principles...

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Unformatted text preview: Chapter 7 Chapter Accounting Principles Financial Accounting, Sixth Edition Chapter 7 -1 Accounting Principles The Conceptual Framework of Accounting Objectives of Objectives reporting Qualitative characteristics characteristics Elements of Elements financial statements Operating guidelines guidelines Chapter 7 -2 Assumptions Principles Monetary unit Economic Economic entity entity Time period Revenue Revenue recognition Matching Matching Going Going concern concern Full Full disclosure disclosure Cost Constraints Constraints in Accounting Accounting Materiality Conservatism Summary of Summary conceptual framework framework Statement Statement Presentation and Analysis and Classified Classified balance sheet balance Classified Classified income statement Analyzing financial statements An international perspective perspective The Conceptual Framework of Accounting Financial Statements Various users need financial information Balance Sheet Income Statement Statement of Retained Earnings Statement of Cash Flows Note Disclosure The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced. Chapter 7 -3 Generally Accepted Generally Accounting Principles (GAAP) Principles SO 1 Explain the meaning of GAAP and identify the key SO items of the conceptual framework. items The Conceptual Framework of Accounting Organizations Involved in Standard Setting: Securities and Exchange Commission (SEC) http://www.sec.gov/ Financial Accounting Standards Board (FASB) http://www.fasb.org/ Chapter 7 -4 SO 1 Explain the meaning of GAAP and identify the key SO items of the conceptual framework. items The Conceptual Framework of Accounting Conceptual Framework ­ “…a constitution, a coherent system of interrelated objectives and fundamentals.” FASB’s conceptual framework consists of the following: 1. 2. Qualitative characteristics of accounting information. 3. Elements of financial statements. 4. Chapter 7 -5 Objectives of financial reporting. Operating guidelines (assumptions, principles, and constraints). SO 1 Explain the meaning of GAAP and identify the key SO items of the conceptual framework. items Conceptual Framework Objectives of Financial Reporting a) To provide information that is useful to those making investment and credit decisions. a) Helpful in assessing future cash flows. a) Identify the economic resources (assets), the claims to those resources (liabilities), and the changes in those resources and claims. Chapter 7 -6 SO 2 Describe the basic objectives of financial reporting. Conceptual Framework Qualitative Characteristics Relevance – making a difference in a decision. Predictive value Feedback value Timeliness Reliability Verifiable Representational faithfulness Neutral ­ free of error and bias Chapter 7 -7 SO 3 Discuss the qualitative characteristics of accounting SO information and elements of financial statements. information Conceptual Framework Qualitative Characteristics Comparability – Information that is measured and reported in a similar manner for different companies is considered comparable. Consistency ­ When a company applies the same accounting treatment to similar events from period to period. Chapter 7 -8 SO 3 Discuss the qualitative characteristics of accounting SO information and elements of financial statements. information Conceptual Framework Elements of Financial Statements “Moment in Time” Assets Liabilities Equity Chapter 7 -9 “Period of Time” Revenue Expenses Gains Losses SO 3 Discuss the qualitative characteristics of accounting SO information and elements of financial statements. information Conceptual Framework Illustration: Identify the element or elements associated with items below. (a) Obligation to transfer resources arising from a past transaction. (b) Items characterized by future economic benefit. (c) Arises from income statement activities that constitute the entity’s ongoing major or central operations. Chapter 7-10 (b) (a) (c) (c) Elements Assets Liabilities Equity Revenue Expenses SO 3 Discuss the qualitative characteristics of accounting SO information and elements of financial statements. information Conceptual Framework Illustration: Identify the element or elements associated with items below. (b) (d) Residual interest in the net assets of the enterprise. (e) Increases assets through sale of product. (a) (d) (e) (c) (c) Chapter 7-11 Elements Assets Liabilities Equity Revenue Expenses SO 3 Discuss the qualitative characteristics of accounting SO information and elements of financial statements. information Conceptual Framework Operating Guidelines Chapter 7-12 Assumptions Assumptions provide a foundation for the accounting process. Monetary Unit Economic Entity Periodicity Going Concern Chapter 7-13 SO 4 Identify the basic assumptions used by accountants. Assumptions Monetary Unit Only transaction data capable of being expressed in terms of money should be included in the accounting records of the economic entity. Chapter 7-14 SO 4 Identify the basic assumptions used by accountants. Assumptions Economic Entity Economic events can be identified with a particular unit of accountability. Chapter 7-15 SO 4 Identify the basic assumptions used by accountants. Assumptions Time Period The economic life of a business can be divided into artificial time periods. Chapter 7-16 SO 4 Identify the basic assumptions used by accountants. Assumptions Going Concern The enterprise will continue in operation long enough to carry out its existing objectives. Chapter 7-17 SO 4 Identify the basic assumptions used by accountants. Assumptions Illustration: Identify which basic assumption of accounting is best described in each item below. (a) The economic activities of FedEx Corporation are divided into 12­month periods for the purpose of issuing annual reports. (b) Solectron Corporation, Inc. does not adjust amounts in its financial statements for the effects of inflation. (c) Walgreen Co. reports current and noncurrent classifications in its balance sheet. (d) The economic activities of General Electric and its subsidiaries are merged for accounting and reporting purposes. Chapter 7-18 Periodicity Monetary Unit Going Concern Economic Economic Entity Entity SO 4 Identify the basic assumptions used by accountants. Principles Accounting principles dictate how economic events should be recorded and reported. Revenue Recognition Matching (Expense Recognition) Full Disclosure Cost Chapter 7-19 SO 5 Identify the basic principles of accounting. Principles Revenue Recognition ­ companies should recognize revenue in the accounting period in which it is earned. Chapter 7-20 SO 5 Identify the basic principles of accounting. Principles Matching ­ efforts (expenses) should be matched with accomplishment (revenues) whenever it is reasonable and practicable to do so. “Let the expense follow the revenues.” Illustration 7­4 Expense Recognition Chapter 7-21 SO 5 Identify the basic principles of accounting. Principles Matching Principl e Illus tra tio n 7 ­5 Ba s ic P rinc ip le s Chapter 7-22 SO 5 Identify the basic principles of accounting. Principles Full Disclosure – Provided through financial statements, notes to the financial statements, and supplementary information. Illus tra tio n 7 ­5 Ba s ic P rin c ip le s Chapter 7-23 SO 5 Identify the basic principles of accounting. Principles Cost Principle – the price, established by the exchange transaction, is the “cost”. Chapter 7-24 Illus tra tio n 7 ­5 Ba s ic P rin c ip le s SO 5 Identify the basic principles of accounting. Principles Illustration: Identify which basic principle of accounting is best described in each item below. (a) Norfolk Southern Corporation reports revenue in its income statement when it is earned instead of when the cash is collected. (b) Yahoo, Inc. recognizes depreciation expense for a machine over the 2­year period during which that machine helps the company earn revenue. (c) Oracle Corporation reports information about pending lawsuits in the notes to its financial statements. (d) Eastman Kodak Company reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair market value is greater. Chapter 7-25 Revenue Revenue Recognition Recognition Matching Full Full Disclosure Disclosure Cost SO 5 Identify the basic principles of accounting. Constraints in Accounting Constraints permit a company to modify generally accepted accounting principles without reducing the usefulness of the reported information. Materiality Conservatism Chapter 7-26 SO 6 Identify the two constraints in accounting. Constraints in Accounting Materiality ­ an item is material if its inclusion or omission would influence or change the judgment of a reasonable person. Illustration 7­6 Constraints Chapter 7-27 SO 6 Identify the two constraints in accounting. Constraints in Accounting Conservatism ­ When in doubt, choose the method that will be least likely to overstate assets and income. Illustration 7­6 Constraints Chapter 7-28 SO 6 Identify the two constraints in accounting. Constraints in Accounting Illustration What accounting constraints are illustrated by the items below? (a) Crimson Tide Corporation does not accrue a contingent lawsuit gain of $650,000. (b) Sun Devil Corporation expenses the cost of wastebaskets in the year they are acquired. Chapter 7-29 Conservatism Materiality SO 6 Identify the two constraints in accounting. Summary of Conceptual Framework Chapter 7-30 Statement Presentation and Analysis Classified Balance Sheet Chapter 7-31 Illus tra tio n 7 ­8 S ta nd a rd c la s s ific a tio n SO 7 Understand and analyze classified financial statements. Statement Presentation and Analysis Classified Balance Sheet Illus tra tio n 7 ­9 P ro p rie to rs h ip b a la n c e s he e t A proprietorship, the balance sheet uses the term “Owner’s equity” instead of “Stockholders’ equity” Chapter 7-32 SO 7 Understand and analyze classified financial statements. Statement Presentation and Analysis Classified Balance Sheet Illus tra tio n 7 ­1 0 P a rtne rs h ip b a la nc e s he e t In a partnership, each partner has a separate capital account. Chapter 7-33 SO 7 Understand and analyze classified financial statements. Statement Presentation and Analysis Classified Income Statement A multiple-step income statement generally includes the following. Sales revenue Cost of goods Operating Other revenues and gains Other expenses and losses Two additional items are income tax expense and earnings per share. Chapter 7-34 SO 7 Understand and analyze classified financial statements. Statement Presentation and Analysis Classified Income Statement Chapter 7-35 Illus tra tio n 7 ­1 1 Inc o m e ta xe s SO 7 Understand and analyze classified financial statements. Statement Presentation and Analysis Classified Income Statement Earnings Per Share = Net Income Number of Common Shares Outstanding Indicates the net income earned by each share of outstanding common stock. Chapter 7-36 SO 7 Understand and analyze classified financial statements. Statement Presentation and Analysis Analyzing Financial Statements Three major characteristics are generally used: Liquidity, Profitability, and Solvency. Chapter 7-37 SO 7 Understand and analyze classified financial statements. Statement Presentation and Analysis Liquidit y This ratio means that current assets are more than two times greater than current liabilities. Chapter 7-38 SO 7 Understand and analyze classified financial statements. Statement Presentation and Analysis Liquidit y Working capital provides some indication of the company’s ability to meet its existing current obligations. Chapter 7-39 SO 7 Understand and analyze classified financial statements. Statement Presentation and Analysis Profitability Chapter 7-40 SO 7 Understand and analyze classified financial statements. Statement Presentation and Analysis Profitability Profitability ratios measure the income or operating success of a company for a given period of time. Profit Margin Percentage measures the percentage of each dollar of sales that results in net income. Chapter 7-41 SO 7 Understand and analyze classified financial statements. Statement Presentation and Analysis Profitability Return on Assets is an overall measure of profitability. Return on Common Equity shows the percentage of net income earned for each dollar of owners’ investment. Chapter 7-42 SO 7 Understand and analyze classified financial statements. Statement Presentation and Analysis Solvency Solvency measures the ability of an enterprise to survive over a long period of time. Debt to Total Assets measures the percentage of total assets that creditors, as opposed to stockholders, provide. Chapter 7-43 SO 7 Understand and analyze classified financial statements. ...
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