1-1

Financial Accounting
Textbook: Spiceland 4th Edition
Chapter1: A Framework for Financial Accounting

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-2

Part A

Accounting as a Measurement/
Communication Process

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-3

Learning Objective 1

Describe the two primary functions of

financial accounting

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-4

Accounting
A system of maintaining records of a companys
operations and communicating that information to
decision makers

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-5

Accounting Information
Managerial accounting: information provided for
internal users
Financial accounting: information provided for
external users

Internal users

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-6

Primary Functions of Financial

Accounting
Measure business activities
Communicate measurements for decision
making

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-7

Illustration 1.2Framework for

Financial Accounting

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-8

Learning Objective 2

Understand the business activities that

financial accounting measures

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-9

Business Structure
Sole proprietorship: business is owned by one
person
Partnership: business is owned by two or more
persons
Corporation: business is legally separate from its
owners
Owner-manager separation typical
Limited liability of stockholders
Double taxation

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-10

Business Activities
Financing activities Investing activities

Business
Involves Activities Involves
funding from purchase and
external sale of long-
sources term resources
Operating activities

Involves
transactions in
primary
operations of
business
Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-11

Basic Accounting Equation

Explains resources and their claims

Measure Profitability
Revenues Expenses = Net income (loss)

Dividends: distributions to owners

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-12

Business Activities and

Their Measurement

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-13

Learning Objective 3

Determine how financial accounting information is

communicated through financial statements

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-14

Communicating Through
Financial Statements
Primary financial statements
Income statement
Statement of stockholders equity
Balance sheet
Statement of cash flows

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-15

Income Statement
Reports the companys revenues and expenses
over an interval of time
Shows whether revenues were enough to cover
expenses (Profitability)

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-16

Illustration 1.5Income Statement

Revenues Expenses = Net income (loss)

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-17

Statement of Stockholders Equity

Summarizes the changes in stockholders

equity over an interval of time

Stockholders Equity (Owners Claims)

= Common Stock + Retained Earnings

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-18

Illustration 1.6Statement of Stockholders

Equity

Ending Balance of Retained Earnings = Beginning balance of Retained

Earnings + Net Income - Dividends

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-19

Balance Sheet

Presents the financial position of the

company on a particular date

Assets = Liabilities + Stockholders Equity

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-20

Illustration 1.7Balance Sheet

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-21

Statement of Cash Flows

Measures activities involving cash receipts and
cash payments over an interval of time

Can be classified into three categories

Operating Investing Financing

cash flows cash flows cash flows

Not required by our course!

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-22

Illustration 1.8Statement of Cash Flows

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-23
Illustration 1.9Links among Financial
Statements

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-24

Learning Objective 4

Describe the role that financial accounting plays in

the decision-making process

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Illustration 1.10Use of Financial Accounting 1-25

Information in Investing and Lending

Decisions

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-26

Part B

Financial Accounting Information

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-27

Learning Objective 5

Explain the term generally accepted accounting

principles (GAAP) and describe the role of GAAP in
financial accounting

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-28

Rules of Financial Accounting

make their decisions

based on
Investors & Financial Accounting
Creditors Information
Should be based
on formal
standards

Generally Accepted Accounting Principles

(GAAP)

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-29

Current Standard Setting

United States Global

Financial Accounting International Accounting

Standards Board (FASB) Standards Board (IASB)

Governed by
Securities and Exchange
Commission (SEC)

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-30

Role of Auditors
Trained individuals hired by a company as an
independent party to verify accuracy of that
companys financial statements
Role of auditors

Help ensure that Help investors and

management has in fact creditors in their decisions
appropriately applied GAAP by adding credibility to
in preparing the companys the financial statements.
financial statements

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-31

Objectives of Financial
Accounting
Financial accounting should provide information
that:
Is useful to investors and creditors in making
decisions
Helps to predict cash flow
Tells about economic resources, claims to
resources, and changes in resources and claims

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-32

Part C

Careers in Accounting

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-33

Learning Objective 6

Identify career opportunities in accounting

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-34

Illustration 1.14Some Career

Options

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-35

Illustration 1.14Some Career

Options

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-36

Learning Objective 7

Explain the nature of the conceptual framework

used to develop generally accepted accounting
principles

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-37

What is Conceptual Framework

Conceptual
Framework

GAAP (Generally
Accepted
Accounting
Principles)

Financial
Statements

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-38

Conceptual Framework
Appendix
Qualitative characteristics
Enhancing qualitative characteristics
Cost effectiveness constraint
Underlying assumptions

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-39

Illustration 1.15Qualitative Characteristics

of Useful Financial Information

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-40

Cost Effectiveness Constraint

Cost constraint suggests that:
Financial accounting information is provided only
when the benefits of doing so exceed the costs

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-41

Underlying Assumptions
Economic Entity Monetary Unit
Assumption Assumption

Identify all economic events

Need a unit or scale of
with a particular economic
measurement
entity

Periodicity Going Concern

Assumption Assumption

Provide information of an
Business entity will continue
enterprise at regular time
to operate indefinitely
periods

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-42

Summary
Describe the two primary functions of financial
accounting
Understand the business activities that financial
accounting measures
Determine how financial accounting information is
communicated through financial statements
Describe the role that financial accounting plays in
the decision-making process

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-43

Summary
Explain the term generally accepted accounting
principles (GAAP) and describe the role of GAAP
in financial accounting
Identify career opportunities in accounting
Explain the nature of the conceptual framework
used to develop generally accepted accounting
principles

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 1-44

End of Chapter 1

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.