FINANCIAL ACCOUNTING HMK

Accounting information as an aid to decision making. The annual report. Types of

ownership. Regulation of financial reporting. Auditing

 Accounting system  The series of steps an organization uses to record financial

data and convert them into informative financial statements.
 Accounting as an Aid to Decision Making:
o Decisions that have economic consequences
o Shows where and when a company spends money and makes commitments.
It also helps predict the future effects of decisions, and it helps direct
attention to current problems, imperfections, and inefficiencies, as well as
opportunities.

 Annual report  A document prepared by management and distributed to current

and potential investors to inform them about the company’s past performance and
future prospects.
 The annual report:
o a document prepared by management and distributed to current and
potential investors to inform them about the company’s past performance
and future prospects.
o In addition to the financial statements, annual reports usually include the
following:
 A letter from corporate management
 A discussion and analysis by management of recent economic events
 Footnotes that explain many elements of the financial statements in
more detail
 The report of the independent registered public accounting firm
(auditors)
 Statements by both management and auditors on the company’s
internal controls
 Other corporate information
o Used to promote the company
SESSION 2

ACCOUNTING: THE LANGUAGE OF BUSINESS

 Accounting process of identifying, recording, summarizing, and reporting
economic information to decision-makers
 Types of accounting:
o Tax
o Non-Profit (donors, governments)
o Managerial
o Financial (outsiders)  reporting economic events to outsiders
o Cost
 Stakeholders  groups that are interested in the business because they are affected
by its decisions
 Principal components of annual financial reports:
o A letter from corporate management
o Management’s discussion and analysis of past and possible future
transaction, events, circumstances
o Financial statements
o Footnotes that explain many elements of the financial statements in more
detail
o The report of the independent registered public accounting firm (auditors)
o Statements by both management and auditors on the company’s internal
controls
o Other corporate information
 Sequence of events leading to financial statements found in those reports:
1. Measurable economic event occurs
2. Private (work for the reporting entity) accountants analyse event to
determine what elements/accounts are affected, then record the event
3. Records are summarized into financial statements
4. Financial reports that include the statements are provided to users who make
decisions
 Characteristics of Financial Reports:
o Prepared by management
o Provided to outsiders quarterly and annually
o Primarily about past transactions and events
o Tell very little about future transactions, events, or circumstances
 Financial Statements (part of those reports)
o Balance sheet
o Income statement
o Statement of Cash Flows
o Statement of Stockholders’ Equity
 Accessing Financial Reports and Statements
o Company’s website
o Formally sent or made available to owners by prepares
o Formally filed with Government Agencies
Comparative Ownership Features
 Sole proprietorship  a single owner
 Partnership  two or more co-owners
 Corporation:
o Public
o Private
 Limited liability
 Easy transfer of ownership
 Ability to raise capital from thousands
 Continuity of existence
 Prestige
 Unfavourable tax laws
 Regulation

Differences in Reporting Owners’ Equity

 Shareholders elect a board of directors to look out for their interests
 Board of directors
o CEOs + presidents of another corporation
 Senior managers – run day to day operations

Regulation of Financial Reporting

 Federal Government:
o Legislative passes laws regulating financial reporting
o Judicial – enforces laws
o Executive – proposed, signs, administers budgets and laws
 SEC – Has statutory and authority to:
o Regulate investment management activities
o Regulate stock market activities
o Investigate violation of security laws
o Control financial reports

 Shareholders  audit report adds credibility to the financial statements they use
when making decisions

Auditing
 Audit  examination of a company’s transactions and the resulting financial
statements
 Standard report included the following topics:
o Intro – what was audited?
o Scope – how was the audit conducted?
o Opinion as to:
 Fairness of financial statements
 Degree to which GAAP was followed