Department of Accountancy

Financial Accounting
Structure/Environment

Greg Davis, Accountancy Lecturer

 Week 1 Learning Objectives

Course introduction
Focus of financial accounting
(financial statements)

2
 Week 1 Learning Objectives

GAAP vs IFRS & convergence

ACCY standards (key GAAP
assumptions)

3
Lesson 1

What Is the Key Focus of Financial

Accounting?
Focus of Financial Accounting

Provide financial information to

external users:
Investors (current/future
shareholders)

Creditors (banks & other lenders)

Others (customers, suppliers, &

government agencies)
Focus of Financial Accounting
Information is provided in
financial statements and
related disclosure notes:
1. Income Statement
2. Statement of Shareholders’
Equity
3. Balance Sheet
4. Statement of Cash Flows
The Investment-Credit Decision
Why do investors and creditors
provide capital?
Earn a fair return (rate of return
calculation)
Shareholders want two things:
Periodic dividends

Share price increase

Rate of Return Calculation Example

Professor Davis invests $1,000

in Company Y on 1/1/15. If he
receives $50 in dividends
during the year and then sells
his shares of stock at the end
of 2015 for $1,050, what is his
rate of return?
Rate of Return Calculation Example

Investors and creditors prefer

to invest in stocks that provide
a high expected rate of return
relative to risk!
Lesson 2

Cash vs Accrual Accounting

 Cash vs Accrual Accounting

Cash basis accounting (< $5M

revenue):
Simple measurements based
on cash receipts & payments
Difference is net Operating
Cash Flow (OCF)

11
 Cash vs Accrual Accounting

Accrual basis accounting:

Measurement of revenue &
related expenses, regardless of
when the cash is paid or
received
Difference is net income or loss

12
 Cash Accounting Example

13
 Accrual Accounting Example

14
Lesson 3

GAAP, IFRS, & Convergence

 U.S. Financial Accounting Standards

Generally Accepted Accounting

Principles (GAAP)
The measurement and
disclosure rules used to
develop financial statements
and related notes

16
 U.S. Financial Accounting Standards

Established by Financial
Accounting Standards Board
(FASB)
FASB is a private sector body
with oversight from the
Securities & Exchange
Commission (SEC).

17
 FASB Codification
Key topics and their reference
codes include:
General Principles 100-199

Presentation 200-299

Assets 300-399

Liabilities 400-499

Equity 500-599
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 FASB Codification

Revenues 600-699

Expenses 700-799

Broad Transactions 800-899

Industry 900-999

19
Accounting Standards – Acronym Alert!
What are the financial
accounting standards called?
In the U.S. – GAAP

Internationally – IFRS

Who sets financial accounting

standards?
In the U.S. – FASB

Internationally – IASB
 Convergence Efforts: U.S. & International
Accounting Standards
2002: FASB & IASB sign the
“Norwalk Agreement.”
2008: SEC Roadmap listed all
conditions to be achieved
before US shift to IFRS.
2011: Two studies by SEC
identified key differences.
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 Convergence Efforts: U.S. & International
Accounting Standards

2012: SEC Final Staff Report

concluded that it is NOT
feasible for U.S. to adopt IFRS
due to:
1. High costs of conversion to U.S.
companies

2. Need for U.S. to have stronger

influence on standards
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Lesson 4

Accounting Standards & GAAP

Assumptions
Fundamental Qualitative Characteristics

Relevance
Predictive/confirmatory value
Materiality
Faithful representation
Fundamental Qualitative Characteristics

Completeness
Neutrality
Free from error
Constraint: Cost effectiveness
(cost/benefit)
Enhancing Qualitative Characteristics
Comparability (consistency)
Verifiability (objectivity)
Timeliness (SEC filing
requirements)
Understandability (can users
comprehend it)
Constraint: Cost effectiveness
(cost/benefit)
GAAP Key Assumptions

Economic entity
Going concern
Periodicity
Monetary unit (U.S. $)
Recognition, Measurement, & Disclosure

Recognition: General criteria

for revenue and matching
expense (revenue recognition
covered in next course)
Measurement: Key financial
elements must be measured
(GAAP – mixed attribute
model)
Recognition, Measurement, & Disclosure

Disclosure: Must include

additional pertinent information
in financial statements and
notes
Wrap-Up

Focus: Provide financial

statements to external users
Cash vs accrual accounting
GAAP vs IFRS
Wrap-Up

ACCY standards & GAAP

assumptions
FASB interview