Notes from professor Brian Bouche in Introduction to Financial Accounting

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Definition:

  1. recording business transactions
  2. summary of financial performance
  3. for readers

Three types of accounting books (classified by readers):

  1. financial accounting → external
  2. tax accounting → IRS
  3. managerial accounting → internal

Financial reporting requirements (by SEC):

  1. 10-K: annual
  2. 10-Q: quarterly
  3. 8-K: current, material event (anything important enough to move stock price)
  4. Must be prepared in accordance with Generally Accepted Accounting Principles (GAAP)

Financial reporting requirements:

  1. Balance Sheet: financial position (listing of resources and obligations) on a specific date
  2. Income Statement: results of operations over a period of time using accrual accounting
  3. Statement of Cash Flows: sources and uses of cash over a period of time
  4. Statement of Stockholders’ Equity: changes in stockholders’ equity over a period of time

Two Big Accounting Standards:

  1. GAAP:

established by U.S. Congress, but they delegate to

SEC, then they delegate to

Financial Accounting Standards Board (FASB, in Norwalk, Connecticut), they delegate to

Emerging Issue Task Force (EITF)

America’s Institute of CPA’s (AICPA)

2. International Financial Reporting Standards (IFRS):

established by the IASB (in London)and are required in over 100 countries

Fun fact:

Management is responsible for preparing financial statements:

  1. The Audit Committee of the Board of Directors provides oversight of management’s process
  2. Auditors are hired by the Board to “express an opinion” about whether the statements are prepared in conformity with GAAP

(The auditor for Enron is hired by Enron…….)

The SEC and other regulators take action against the firm if any violation of GAAP or other rules are found, but these regulators are usually reactive rather than proactive. They usually don’t start investigation until someone brought the problem to the public. Information intermediaries (stock analysts, institutional investors, the media) may expose or flee firms with questionable accounting.

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Example of household buying a house
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Example in subprime crisis
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Assets are recognized when:

  1. it is acquired in a past transaction or exchange
  2. the value of its future benefits can be measured with a reasonable degree of precision

Liabilities are recognized when:

  1. The obligation is based on benefits or services received currently or in the past
  2. The amount and timing of payment is reasonably certain
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Dividends are not expense. When the board declare dividends but does not pay for it, it creates dividends payable liability where the owner of the dividends became creditors.

Three Fundamental Bookkeeping Equations:

  1. Assets = Liability + SE
  2. Sum of Debits (left entries) = Sum of Credits (right entries)
  3. Beginning account + Increases — Decreases = Ending account balance
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Example of journal entries

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Written by

I am a Machine Learning Engineer with special interest in mental health and finance.

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