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Summary Financial Reporting and Auditing
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Summary of Financial Reporting and Auditing for MA1 Business Engineering at the VUB.
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FINANCIAL REPORTING ANDAUDITING
INTERNATIONAL BUSINESS MA 1, SEMESTER 1
FINANCIAL REPORTING
- PART 1: Basic Accounting Techniques p. 1
- PART 2: Conceptual Framework and GAAP p. 17
- PART 3: Financial Statement Analysis p. 31
- PART 4: Cash Flow Statement p. 59
- PART 5: Consolidation Techniques p. 71
- PART 6: Creative Accounting p. 81
AUDITING
- PART 7: Overall Objectives of an Independent Audit p. 99
- PART 8: Audit Risk Model p. 123
- PART 9: The Auditor’s Opinion p. 135
p. 153
,FINANCIAL REPORTING AND AUDITING INTERNATIONAL BUSINESS
MA 1
General Information:
- Test Basic Accounting 19 Oct: 5%
- Final written exam: 55%
- Assignment in group of 2 people where you must analyze the financial statements of a large, listed company: 40%
PART 1: BASIC ACCOUNTING TECHNIQUES
In Book:
- Chapter 3: Accounting concepts and the balance sheet equation
- Chapter 4: Accrual accounting (incl. inventory accounting techniques)
- Chapter 5: Non-current assets and depreciation
- Chapter 6: Refining the accounting system (incl. asset impairment and. Bad debts)
- Chapter 7: Preparing financial statements
Accounting: The Language of Business
- Accounting: a process of identifying, recording, summarizing, and reporting economic
information (transactions- to decision makers in the form of financial statements
- We will summarize it in financial statement that will be used by users, stakeholders of the company
o Stakeholders: Investors, Shareholders, Government (Taxes and statistics such as GDP), Creditors (different
types: banks for lending money, creditors that are short term creditors, which are suppliers, sell products and
services) hopefully as a company you get some credits.
Accountant’s Financial
EVENT analysis and Users
Statements
recording
Users of Financial Information:
- Accounting information is useful to anyone who makes decisions that influence business activities
and have economic results
o Investors/ Shareholders
§ Want to know if a company is a good investment with adequate returns
o Creditors (bank/suppliers)
§ Want to know if they should extend credit, how much to extend, and for how
long
o Clients
§ Want to know if they can rely on proper after sales service
o (Future) Employees:
§ Want to know if the company is able to provide job security and a good salary
o Government agencies (tax collection, grants)
o The public
o …
Financial Accounting vs Management Accounting
- The major distinction between financial and management accounting is the users of the
information
o Financial accounting focuses on the specific needs of decision makers EXTERNAL to the
organization, such as SH, suppliers, banks, and government agencies
o Management accounting serves INTERNAL users, such as top executives, management,
and administrators within organizations (a.o. budgets, forecasts, projections)
1
,FINANCIAL REPORTING AND AUDITING INTERNATIONAL BUSINESS
MA 1
- Externally disseminated financial statements have to be drawn up by reference to a set of
accounting rules. These might be different depending on the jurisdiction. This course focuses on
the rules issued by the International Accounting Standards Board (IASB) – International
Accounting Standards/International Financial Reporting Standards (IAS/IFRS)
Annual Financial Statements
- IAS 1:
o The primary questions about an organization’s success that decision makers want to
know are:
o A lot of principles are the same
§ Financial statements (categories are the same)
• Income statement, expenses, B/S, Cash flow, statement of changes in
equity (Retained earnings, Retained equity)
• Notes to the financial statement (which principle (FIFO, straight line
depreciation…)
• Management discussion and analysis
§ Focus on the basic financial statement
• Basic knowledge of the B/S and the income statement
2
, FINANCIAL REPORTING AND AUDITING INTERNATIONAL BUSINESS
MA 1
Balance Sheet: T-account (debit and credit side)
- Snapshot at one point in time in the life of a business
o Asset side (left side)
§ Resources that the company has, what they will use to operate, resources that
will produce cash flows to the company.
• Belongings of the company that they will split between long lived assets
and short-term assets (Follow into cash flow in 12 months).
o Account Receivable: sell something on credit, sold for but not yet
paid for, right to get paid.
o Financial Resources: where does the cash comes from, how is it paid for?
§ Summing up the stakeholders we sum up the financial resources part
• What are the 2 main financial resources of a company?
o Equity (investors), liabilities (creditors, either the bank or
suppliers (accounts payable)
o Assets always need to be equal to liabilities + equity (stockholder’s equity)
The Balance Sheet Equation:
Assets = Liabilities + Owner’s Equity (entity approach)
Assets – Liabilities = Owner’s Equity (proprietary approach)
- The Balance Sheet equation basis for double-entry accounting =recording method whereby at
least 2 accounts are always affected by each transaction
o An account = a summary record of the changes in a particular asset, liability or owner’s
equity during a period.
3
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