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ACCT303 Chapter 1 teaching pp

ACCT303 Chapter 1 teaching pp - Chapter 1 The Economic and...

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Chapter 1 The Economic and Institutional Setting for Financial Reporting Learning Objectives: What is accounting? Why financial statements are important? Who are the users of financial statements? How do these users use financial statements? What is GAAP? What is the standard setting process? What are some qualitative characteristics of accounting information? What are some major concepts and assumptions underlying accounting principles? 1
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What is Accounting ? An information system to account for all business transactions and translate these transactions into accounting/financial terms to be reported in financial statements. 2
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Why Financial Statements Are Important  ? Assess the risks (i.e., credit risk, asset risk) Provide a comprehensive economic history of a business entity Thus, financial statement can be used for various purposes (p3 of the textbook): As an analytical tool. As a management report card. As an early warning signal. As a basis for prediction. As a measure of accountability. 3
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Financial Information Accounting? Identifies and Measures and Communicates Balance Sheet Income Statement Statement of Cash Flows Statement of Owners’ or Stockholders’ Equity Note Disclosures President’s letter Prospectuses, SEC Reporting News releases Forecasts Environmental Reports Etc. GAAP Not GAAP Financial Statements Additional Information Economic Entity Financial Statements and Financial Reporting 4
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Learning Objective : Describe the demand and supply for financial statements 5
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Who are the users of Financial Statements ? Why do they demand financial Statements?   Shareholders and investors 1. Investment decisions/stewardship function 2. Proxy contests Lenders and suppliers 1. Lending decisions 2. Covenant compliance Customers 1. Supplier’s health 2. Repeat purchases 3. Warranties & supports Managers and employees 1. Performance assessment 2. Compensation contracts 3. Company-sponsored pension plans Government and regulatory agencies 1. Mandatory reporting 2. Taxing authorities 3. Regulated industries 6
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Supply  of financial information Relevant financial information is provided primarily through financial statements and related disclosure notes. Major Financial statements: Balance Sheet, Income Statement, Statement of Stockholders Equity and Statement of Cash Flows. Disclosures Other forms of information: Press releases and management discussions (MD&A). 7
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Type of Disclosures: Mandatory Disclosure (i.e., leases, pension plans, etc.): Required by the SEC and accounting standards. Voluntary disclosure: Guided by cost/benefit considerations. 8
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Disclosure Benefits   The following are benefits arising from voluntary disclosures : Increase investors’ confidence on the quality of company’s equity offerings.
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