Week 1 - Chapter 1

Week 1 –
Chapter 1
ACCT 6301 – FALL 2019
8/19/2019 COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 1

Introductions
Tonight’s
Topics Review Syllabus
Chapter 1 Lecture

Chapter 1 –
Introduction to
Financial
Accounting
ACCT 6301 – FINANCIAL ACCOUNTING – FALL 2019
8/19/2019 COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 1-3

Why Study
Accounting?
The language of business
Know how to interpret business results
Enables decision making
Will help you succeed in your career – financial
acumen

Identify the
users of
accounting
Learning Objective
LEARNING
OBJECTIVE 1 information and
discuss the costs
and benefits of
disclosure.
COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS
What is Accounting?
Accounting is…
◦ The process of recording, summarizing, and analyzing financial transactions
◦ To help people make economic decisions
Financial Accounting Managerial Accounting

 Designed primarily for decision  Designed primarily for decision
makers outside of the company makers within the
company
COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 6

Who Uses Accounting
Information?
Current
Shareholders
Potential
Management
Shareholders
Government
Customers
Demand for Agencies
Information
Suppliers Directors
Financial
Creditors
Analysts

Information Needs of
Decision Makers
Financial Accounting Managerial Accounting
Who are the Decision Makers?
Investors and analysts  Top management
Creditors  Marketing Teams
Suppliers and customers  Production and operations
What Decisions are Made?

 Buy and sell stock?  Develop new strategy?
 Lend or not?  Launch a new product or not?
 Purchase/sell goods or not?  Manage operations
What Information is Needed?

 Sales and costs  Product sales and costs
 Cash in and cash out  Department performance
 Assets and liabilities  Budgets and quality reports

Forms of Business Ownership
CORPORATION A Legal Entity
A large number of owners or shareholders not involved in managing day-to-day operations of the company
SOLE PROPRIETORSHIP
A single owner who typically manages the daily operations
PARTNERSHIP
Two or more owners who are usually involved in managing the business

The shareholders of large corporations…
◦ Provide resources such as cash to a corporation in
exchange for stock ownership
Shareholder ◦ Not involved in day-to-day business operations
s ◦ Rely on financial statement information

◦ To evaluate management performance
◦ Assess the company’s financial condition
◦ Predict future success

Growth of Corporations
Begin as small privately held businesses
Expansion requires more capital for growth
Sell more stock Borrow
Public financing through Private funding,

organized stock exchanges Banks / Investors
Creditors
◦ Banks and other lenders that provide money that must be
repaid
Creditors ◦ Use financial accounting information to assess loan terms,
loan amounts, interest rates, collateral
and Suppliers
Suppliers ◦ Provide supplies, inventory, etc. needed for operations
◦ Use financial information to establish credit sales terms
and to determine long-term commitment to supply-chain
relations

Management
◦ Compensation often linked to financial performance
through bonuses, stock options and other incentive
compensation
Managers Board of Directors

and ◦ Elected by shareholders to represent shareholder interest
Directors and oversee management
◦ Required by law for publicly traded companies
◦ Uses financial accounting to review the results of
operations, evaluate future strategy, and assess
management performance

Other Uses of Financial
Information
Financial Analysts
Prospective employees
Labor unions
Customers
Tax agencies
Other government agencies

What is disclosure?
◦ Providing
Benefits
◦ May lower financing costs through lower borrowing rates
Costs and ◦ May lower operating costs through better prices from
Benefits of suppliers who see a long-term relationship
Disclosure Cost
◦ Hiring accountants to prepare financial statements
◦ Cost of allowing competitors to see information
◦ Political costs–regulation and increased taxes

Describe a
company’s
business
Learning Objective activities
LEARNING and explain how
OBJECTIVE 2
these activities are
represented by the
accounting
equation.
Business Activities
A business plans activities, finances those activities, invests

resources into those activities, and then engages in operating
activities.

Planning Activities
Planning
Goals—Primary goal is to create value for the owners
Strategies—How a company plans to achieve its goals
Strategic Plan
Describes how the company plans to achieved its goals

Investing Activities
What are investing activities?
◦ Activities that consist of acquiring and disposing of resources (assets) that a company uses to produce and
sell its products or provide its services
Short-Term Assets Long-Term Assets

 Resources used quickly, such as  Resources used over longer
inventory periods of time, such as
equipment

Mix of Assets Held by
Companies
Relative Proportion of Short-Term and Long-Term Assets
Why might Verizon and Procter & Gamble have high

proportions of long-term assets?

Financing Activities
What are financing activities?
◦ Methods that companies use to fund investments
What is financial management?

◦ Planning of resource needs, including the proper mix of financing sources
Two sources of external financing

◦ Debt financing (Creditors)
◦ Equity financing (Owners)

Mix of Financing Sources
Held by Companies
Relative Proportion of Credit and Equity Financing
Which company has the lowest

proportion of liabilities?
Financing Activities
Creditor Owner
Investing = Financing + Financing
Assets Liabilities Equity

Economic resources = Nonowner claims + Owner claims
on asset on asset
At fiscal year-end 2018, Nike reported:

$22,536 million = $12,724 million + $9,812 million

Operating Activities
The production, promotion, and selling of products and services:
Inventory
Salaries Input Output
Customers
Materials Markets Markets
Logistics
Generate operating revenues and
Generate operating expenses some operating expenses
(marketing and distribution)
In fiscal year end 2018, Nike reported:

$1,933 million = $36,397 million – $34,463 million
Income = Revenues – Expenses

Introduce the four key
financial statements
including the balance
Learning Objective
sheet, income
LEARNING
OBJECTIVE 3 statement, statement
of stockholders’
equity,
and statement of cash
flows.
Financial Statement Links
Reports the company’s financial Reports performance over a
position at a point in time. period of time.

Reporting Periods
Can be annual, semiannual, quarterly, or monthly reporting periods
Fiscal year
◦ A one-year reporting period
◦ Often called an accounting year
◦ Sometimes ends on a date other than December 31
Nike’s fiscal year ends

on May 31.

Balance Sheet
Lists the company’s investments and sources of financing using the accounting equation.
Assets = Liabilities + Owner’s Equity
A.K.A.
Statement of Financial
Position +

Nike’s Balance Sheet
Balance Sheet ($ millions)
Nike’s owner financing totals $9,812 million while creditor financing

totals $12,724 million.

Income Statement
Reports the results of a company’s operating activities over a
period of time.
Revenues – Expenses = Net Income

A.K.A.
Statement of Income
and the
Statement of Earnings
and the
Statement of Operations
and the
Statement of Profit and Loss
Nike’s Income Statement
Nike’s profit is $1,933 million for its fiscal year ending May 31,
2018. Income Statement ($ millions)
A more detailed format:

Income Statement with Gross Profit Subtotal ($ millions)

Reports on changes in equity over a period of time
Contributed capital
Statement ◦ Amounts from issuing new stock during the period
of ◦ Common stock and additional paid-in capital
Stockholders Retained earnings
’ Equity ◦ Cumulative income since the company began business
minus dividends paid out to shareholders
Other stockholders’ equity changes

Nike’s
Statement of Stockholders’
Equity
Statement of Stockholders’ Equity ($ millions)
Nike’s paid out $1,265 million of its profit as dividends to

shareholders during its fiscal year ending May 31, 2018.

Reports net cash flows from operating, investing,
Statement and financing activities over a period of time
of Cash Operating cash flows differ from net income
Flows ◦ Due to differences in the time that revenues and expenses
are recorded and the time the cash is received and paid

Nike’s
Statement of Cash Flows
Statement of Cash Flows ($ millions)
Nike generated $4,955 million of cash from operations during the

year ending May 31, 2018.

Comparison of Net Income
to Operating Cash Flows
Comparison of Net Income to Operating Cash Flows

Review the linkages
between the four key
financial statements:
Learning Objective
LEARNING balance sheet,
OBJECTIVE 3
(CONTINUED)
income statement,
statement of
stockholders’ equity,
and statement of cash
flows.
Financial Statement Links
Reports the company’s financial Reports performance over a
position at a point in time. period of time.

Financial Statement Linkages
A central feature of accounting is the linkage among the 4 primary
statements
◦ Called articulation of financial statements
How did cash (on the balance Look at Statement of

sheet) change? Cash Flows
How did equity (on the balance Look at Statement of Stockholders’

sheet) change? Equity
How did operations affect Look at Statement of

retained earnings (on the balance Income
sheet)?

Nike’s Statement Articulation

Information
Beyond Financial Statements
Extensive review of company information is communicated in these reports.
Management Discussion and Analysis (MD&A)
Independent Auditor Reports
Financial Statement Footnotes
Regulatory filings including proxy statements and other SEC

filings

Describe the
institutions that
regulate
Learning Objective financial
LEARNING accounting and their
OBJECTIVE 4
role in establishing
generally accepted
accounting
principles.
Generally Accepted
Accounting Principles (GAAP)
Standards and accepted practices designed to guide the preparation of financial
statements
Based on underlying principles (GAAP)
Allows considerable discretion in preparation
Enables external users to rely on audited financial statements
These
These financial
financial statements
statements were
were
prepared
prepared in
in accordance
accordance with
with GAAP
GAAP
and
and were
were audited!
audited!

Regulation and Oversight—
The SEC
Securities Act of created Securities & Exchange
1934 Commission (SEC)
The SEC’s Authority

Regulates the issuance and trading of securities in the U.S.
Who must report to the SEC?

Companies with more than $10 million of assets and whose securities are held
by more than 500 owners must file annual and other periodic reports.

Regulation and Oversight—
FASB
Financial Accounting Standards Board
Currently establishes accounting standards in the U.S.
Developed a Conceptual Framework to serve as a guide for accounting issues not covered
by standards
Referred to as FASB by the

accounting profession

Management, Auditors,
and Financial Statements
Management
Prepares the financial statements
Takes responsibility for what is disclosed in the financial statements
Independent Auditors
“Audit” financial statements
◦ As assurance of accuracy and completeness, financial statements of publicly traded companies must be audited by an independent
audit firm.
An audit opinion is not a guarantee.

Sarbanes-Oxley Act of 2002
Referred to as SOX by the accounting profession
Developed by Congress due to concerns over the
Regulation quality of corporate financial reporting
and Goal was to increase the level of confidence that
Oversight— external users have in financial statements
SOX SOX then established the Public Accounting

Oversight Board (PCAOB) to approve auditing
standards and to monitor the quality of financial
statements and audits (GAAP).

Regulation
and
Oversight

Global Perspective
Globalization of capital The diversity of international
markets
+ accounting principles
…has led to an effort to increase comparability of financial

information across countries.
International Accounting Standards Board (IASB)

Charged with creating International Financial Reporting Standards (IFRS)
Has no legal authority to impose accounting standards in any country

Compute two key
ratios that are
commonly
Learning Objective used to
LEARNING assess profitability
OBJECTIVE 5
and risk—return on
equity and the
debt-to-equity
ratio.
Profitability Analysis
Profitability reveals whether a company is able to bring its product or service to
the market in an efficient manner, and whether the market places value on that
product or service.
Return on Equity Net Income

(ROE) = Average Stockholders’ Equity
Nike Adidas
Year ended May 31, 2018 Year ended December 31, 2017
$1,933 = 17.4% $1,097 = 17.0%
[($9,812 + $12,407)/2] [($6,450 + $6,472)/2]
$4,240 = 34.4% $1,017 = 16.8%
[($12,407 + $12,258)/2] [($6,472 + $5,666)/2]
Nike’s ROE declined in the year ended May 2018 and closer to
that of Adidas.

Credit Risk Analysis
Solvency refers to the ability of a company to remain in business and avoid
bankruptcy or financial distress; a risk measure.
Debt-to-Equity Ratio Total Liabilities

= Total Stockholders’ Equity
Nike Adidas
$12,724 = 1.30 $8,087 = 1.25
$9,812 $6,450
$10,852 = 0.88 $8,721 = 1.35
$12,407 $6,472
Nike’s Debt-to-Equity Ratio increased between 2016 and 2017. Nike and
Adidas are more similar in 2017 than 2016

Appendix 1A
Explain the
Learning Objective
LEARNING
OBJECTIVE 6 conceptual
framework for
financial
reporting.
Conceptual Framework
Objectives of Financial Reporting
Financial accounting should provide…
Information that is useful to investors and potential investors, creditors,
and other decision makers.
Information to help investors and creditors assess the amount, timing, and
uncertainty of cash flows.
Information about economic resources and financial claims on these
resources.
Information about a company’s financial performance.
Information that allows decision makers to monitor company
management to evaluate their effectiveness, efficiency, and ethical
stewardship of company resources.
Qualitative Characteristics
of Accounting Information

Developed to help managers, accountants, auditors, and standard setters make reasonable
choices among accounting alternatives.
Benefits > Costs Reported accounting information must be cost effective

Relevance
Must have the ability to make a difference in a decision
 Materiality
 Predictive Value
 Confirmatory Value
Faithful Representation
Must report the economic events that it purports to report
 Neutrality
 Completeness
 Free from error

Conceptual Framework—
Enhancing Qualities
Comparability Should enable users to identify similarities and differences between
sets of economic phenomena
Verifiability Consensus among independent observers could be reached that

reported information is a faithful representation

Enhancing Qualities
Timeliness Should be available to decision makers before it loses its capacity to
influence decisions
Understandability Must be able to be understood by users with reasonable knowledge

of business and economic activities

Qualitative Characteristics
Underlying Assumptions
Separate Economic Entity
Activities of a company are considered independent, distinct, and
separate from activities of its stockholders and other companies
Going Concern
Companies are assumed to have continuity in that they can be
expected to continue in operation over time.
Accounting Period
Operations must be reported periodically
Measuring Unit
Unit of measure is the monetary unit—the dollar in the U.S.

Week 1 - Chapter 1

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Week 1 - Chapter 1

Uploaded by

Copyright:

Available Formats

Week 1 –

8/19/2019 COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 1

8/19/2019 COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 2

8/19/2019 COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 1-3

8/19/2019 COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 4

Financial Accounting Managerial Accounting

COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 6

COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 7

What Decisions are Made?

What Information is Needed?

COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 8

COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 9

Shareholder ◦ Not involved in day-to-day business operations

s ◦ Rely on financial statement information

COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 10

Expansion requires more capital for growth

Sell more stock Borrow

Public financing through Private funding,

COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 12

Managers Board of Directors

COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 13

Other government agencies

COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 15

A business plans activities, finances those activities, invests

COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 17

COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 18

Short-Term Assets Long-Term Assets

COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 19

Why might Verizon and Procter & Gamble have high

COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 20

What is financial management?

Two sources of external financing

COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 21

Which company has the lowest

Assets Liabilities Equity

At fiscal year-end 2018, Nike reported:

COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 23

In fiscal year end 2018, Nike reported:

COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 24

COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 26

Nike’s fiscal year ends

COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 27

Assets = Liabilities + Owner’s Equity

COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 28

Nike’s owner financing totals $9,812 million while creditor financing

COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 29

Revenues – Expenses = Net Income

A more detailed format:

COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 31

Other stockholders’ equity changes

COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 32

Nike’s paid out $1,265 million of its profit as dividends to

COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 33

COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 34

Nike generated $4,955 million of cash from operations during the

COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 35

COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 36

COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 38

How did cash (on the balance Look at Statement of

How did equity (on the balance Look at Statement of Stockholders’

How did operations affect Look at Statement of

COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 39

COPYRIGHT JEFFREY R. KROMER & CAMBRIDGE BUSINESS PUBLISHERS 40