Accounting 101

Moon

Feb 25, 2020·4 min read

Notes from professor Brian Bouche in Introduction to Financial Accounting

Definition:

recording business transactions
summary of financial performance
for readers

Three types of accounting books (classified by readers):

financial accounting → external
tax accounting → IRS
managerial accounting → internal

Financial reporting requirements (by SEC):

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

Financial reporting requirements:

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

Two Big Accounting Standards:

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:

The Audit Committee of the Board of Directors provides oversight of management’s process
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.

Assets are recognized when:

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

Liabilities are recognized when:

The obligation is based on benefits or services received currently or in the past
The amount and timing of payment is reasonably certain

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: