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Unformatted text preview: Introduction to the Mixed Attribute Accounting Model Consider the fundamental accounting identity: Assets = Liabilities + Shareholders Equity o At the instant a firm is formed & receives financing (typically through equity investment by owners or shareholders, but perhaps through debt financing from banks), the BS of a company is simple & the valuation of the assets & liabilities is straightforward o However, valuing the companys assets & liabilities gets less clear (but becomes more interesting) as the company begins deploying that cash, time progresses, & operating activities commence The valuation of assets & liabilities becomes increasingly complex when real companies engage in a numerous & diverse activities o One way to approach this complexity is to apply a standardized framework to analyze the impact of events & transactions on the financial statements o Prior to introducing this framework, this chapter outlines the many different approaches that companies use to value assets & liabilities in the financial statements under US GAAP & IFRS, which reflect the use of a mixed attribute accounting model An important thing to keep in mind is that whether you are concerned w/the valuation of assets & liabilities or in the income effects of events, it is difficult to view them separately o Double-entry bookkeeping views transactions as having 2 equal sides (what is given & gotten; resources = claims on resources), which requires that at least 2 accounts be affected when transactions & events occur that should be reflected in the financial statements o Combined Financial Statement Impacts & Examples: Asset & Asset: a customer pays an A/R (cash increases, A/R decreases) Asset & Liability: a customer prepays for services (cash increases, unearned revenue increases) Liability & Liability: a company refinances a ST loan (ST debt decrease, LT debt increases) Asset & Revenue: a sale is made (A/R increases, revenue increases) Asset & Expense: current month equipment leases are paid (cash decreases, rent expense increases) Liability & Revenue: service is provided to a customer who prepaid (unearned revenue decreases, revenue increases) Liability & Expense: salaries accrued by not paid at month end are recorded (salaries payable increases, salaries expense increases) The intent of the accounting system is to provide relevant info about both the BS & the IS, but emphasizing the usefulness of one sometimes affects the usefulness of the other o The 2 statements are obviously complementary as the BS presents info as of a point in time, whereas the IS presents info about flows b/w 2 points in time o Further, the preparation of the BS & IS is simultaneous, but one has to measure either the BS first, & then directly derive the IS line items, or vice versa o Thus, measurement of different accounts is affected by what perspective the preparer has regarding which financial statement should receive more measurement emphasis o...
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This note was uploaded on 02/22/2012 for the course ACCT 820 taught by Professor Staff during the Fall '09 term at Texas State.
- Fall '09
- Shareholders Equity