Professional Documents
Culture Documents
Financial Accounting
Stockholders Creditors
Accounting System
provided to
Financing
Activities
Investing
Activities
Operating
Activities
Why Study Financial Accounting?
Stockholders’ Equity
The Balance Sheet is a Common Stock
financial snapshot at a Retained Earnings
specific point in time.
Exhibit 1.2 - Balance Sheet
The Basic Accounting Equation
Revenues
Cash and promises received
from delivery of goods and Elements of the
services. Income Statement
Examples:
Sales Revenue Expenses
Service Revenue Resources used to earn
Rental Revenue period’s revenues.
Interest Revenue
Examples:
Cost of Goods Sold
Wages Expense
The Income Statement is a Rent Expense
measure of performance of Depreciation Expense
the business. Insurance Expense
Repair Expense
Income Tax Expense
The Income Statement Equation
Common Stock
Amounts invested in the Elements of the
business by stockholders. Statement of
Stockholders’
Beginning Common Stock Equity
+ Stock Issuance
Ending Common Stock
The Statement of
Retained Earnings Stockholders’ Equity reports
Past earnings not distributed the change in each
to stockholders. stockholders’ equity account
during the period.
Beginning Retained Earnings
+ Net Income
− Dividends
Ending Retained Earnings
Exhibit 1.4 –
Statement of Stockholders’ Equity
Interpreting Retained Earnings
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Learning Objective 1-2
1-2 Identify the role of generally accepted accounting principles
(GAAP) in determining financial statement content and managers’,
directors’, and auditors’ responsibilities for ensuring the accuracy of
the financial statements.
Generally Accepted Accounting Principles
The SEC has worked closely with accountants and other interested
parties to work out the detailed rules that become GAAP principles.
In the U.S., the SEC now allows foreign companies whose stock is
traded in the United States to use IFRS.
Ethical Conduct
Intentional misreporting of financial statements is unethical and illegal.
However, many situations are less clear-cut and required individuals to
weigh one moral principal (e.g., honesty) against another (e.g., loyalty
to a friend).
3.Choose the one you would like your family and friends to see
reported on your local news. That is usually the ethical choice.
Consequences of Unethical Behavior
Crime clearly did not pay for Podlucky and his co-conspirators.
The auditors who missed the fraud agreed to pay $50 million to the creditors.
Wachovia Capital Markets, which marketed the loans, agreed to pay $80 million.
Responsibility and the Need for Controls
Companies should take three important steps to assure investors that the
company’s records are accurate:
1. Maintain a system of internal controls over the records and assets of
the company.
2. Hire external independent auditors to audit the fairness of the financial
statements.
3. Form a committee of the board of directors to oversee the integrity of
these other safeguards.
Supplement A: Types of Business Entities
Advantages of a Corporation:
Stockholders have limited liability
Continuity of life
Ease in transferring ownership (stock)
Opportunity to raise large amounts of money by selling
shares of stock to a large number of people
Disadvantage of a Corporation:
May be subject to double taxation (income taxed when earned
and again when distributed to stockholders as dividends)
Supplement B: Employment in the
Accounting Profession Today
Career Opportunities PROFESSIONAL DESIGNATIONS
Employment by Organizations
Internal accounting such as management, cost accounting, profit planning,
information systems management, internal auditing and more.
External reporting
Tax planning
Many other functions