Summary
Summary Financial Accounting and Reporting
- Course
- Institution
- Book
Summary of the lectures and related chapters in the book.
[Show more]
Connected book
Book Title:
Author(s):
- Edition:
- ISBN:
- Edition:
More summaries for
-
Intermediate Accounting 3rd Edition, by Gordon, Raedy & Sannella,
-
Manual of Intermediate Accounting IFRS 2nd edition
-
Manual of Intermediate Accounting IFRS 2nd edition
Seller
Follow
maurits3
Content preview
Lecture 1- Accounting: The process of identifying, measuring and communicating economic information to
permit informed judgement and decisions by users of the information.
- Financial accounting: The process of identifying, measuring and communicating financial
information about the reporting entity that is useful to capital providers in making decisions about
providing resources to the entity. (Communication via financial reports.) These financial reports are
for use by both internal and external parties.
- When there is a separation of ownership and control, there is a need for additional financial
information.
- Global markets make financial accounting more complex: firms that operate in a lot of countries
must report according to all regulations of this countries.
- When there is more separation between ownership and control, agency problems are likely to arise.
Agency theory can explain the situation of ownership and control.
- Agency theory: Agent is the one who needs to be monitored. Bounded rationality, opportunistic,
self-interested behaviour, risk attitudes. Goal conflicts among participants. Information asymmetry.
Behavioural risks: adverse selection, moral hazard.
- Information asymmetry: Financial reports should help to reduce information asymmetry.
- Assure that information is of high quality: Regulate this information.
- Accounting standards:
o Global accounting standards: Worldwide applicable.
o Local accounting standards: Only applicable on one specific country.
o Principles-based accounting standards: Principles with room for interpretation.
o Rules-based accounting standards: Very specific rules for every specific situation.
(The US consider themselves global, but are local.)
- IFRS: International Financial Reporting Standards.
- IASB: International Accounting Standards Board. Active since 2002 and issues the IFRS. Replace
standards of the IASC (International Accounting Standards Committee) (1973-2002). When the IASB
has not issued the regulations on a specific topic yet, follow the IAS (International Accounting
Standards).
- When do you have to follow the IFRS in the Netherlands: If you are stock-exchange listed or a
financial institution, you have to follow the IFRS, but only for the consolidated statements. For the
other statements, you are also allowed to use the Dutch GAAP rules.
- Objective of financial reporting according to the IASB: The objective of general purpose financial
reporting is to provide financial information about the reporting entity that is useful to existing and
potential investors, lenders and other creditors in making decisions about providing resources to
the entity.
1
,- Objectives of financial reporting: Communicate information that is useful to users in making
economic decisions:
1. Resource allocation decisions: Providing resources to and by an entity:
▪ Buying, selling (or holding) shares and other equity instruments.
▪ Providing or settling loans and other forms of credit.
▪ Profit allocation and dividend distribution decisions.
2. Accountability: Assessing management stewardship:
▪ Monitor managers’ activities.
▪ Managers have to account for choices made.
▪ Assessment of net income
▪ Discharge management from responsibility.
3. Protection of capital providers.
- Example: Observe the following statement. How much dividends can this company pay out?
A company cannot issue unlimited dividends. The correct answer is retained earnings + net income.
In this case, this means 2.100.000 + −1.000.000 = 1.100.000.
- External auditors: Audits financial statements and has to check whether these statements present
a true and fair view of all material aspects. They also have to check whether the statements are
according to the legal standards.
Chapter 1: Financial Reporting and Accounting Standards
- Financial accounting: Process that culminates in the preparation of financial reports of the
enterprise for use by both internal and external parties. Users of these financial reports include
investors, creditors, managers, unions, ad government agencies.
- Managerial accounting: Process of identifying, measuring, analysing, and communicating financial
information needed by management to plan, control, and evaluate a company’s operations.
- Financial statements: Principle means through which a company communicates its financial
information to those outside it:
o Statement of financial position
o Income statement / Statement of comprehensive income
o Statement of cash flows
o Statement of changes in equity
2
,- Capital allocation process:
Financial reporting: Users (present and Capital allocation:
The financial potential): Investors The process of
information a company and creditors use determining how
provides to help users financial reports to and at what cost
with capital allocation make their capital money is allocated
decisions about the allocation decisions. among competing
company. interests.
- Objective of financial reporting: To provide information about the reporting entity that is useful to
present and potential equity investors, lenders, and other creditors in making decisions about
providing resources to the entity.
- Investors and creditors are the primary user group for general-purpose financial statements.
- Entity perspective: Companies are viewed as separate and distinct from their owners (present
shareholders).
- Proprietary perspective: A perspective that financial reporting should be focused only on the needs
of shareholders. This is not considered appropriate!
- Decision-usefulness: Financial reporting provides information that is useful for decision making.
Investors are interested in assessing:
o The company’s ability to generate net cash inflows.
o Management’s ability to protect and enhance the capital providers’ investments.
3
, Lecture 2
Chapter 2
- Conceptual framework for financial reporting:
- Basic objective: To provide financial information about the reporting entity that is useful to present
and potential equity investors, lenders, and other creditors in making decisions about providing
resources to the entity. (Other views on financial reporting also take other stakeholders in the
objective.)
o Provided by issuing general-purpose financial statements.
o Assumption is that users need reasonable knowledge of business and financial accounting
matters to understand the information.
- Basic elements of accounting:
o Asset: A present economic resource controlled by the entity as a result of past events. An
economic resource is a right with the potential to produce economic benefits. E.g. cash,
inventory, machinery.
o Liability: A present obligation of the entity to transfer an economic resource as a result of
past events. E.g. loans, accounts payable.
o Equity: The residual interest in the assets of the entity after deducting all its liabilities. E.g.
retained earnings, shareholders’ capital.
o Income: Increases in assets, or decreases in liabilities, that result in increases in equity, other
than those relating to contributions from holders of equity claims.
o Expenses: Decreases in assets, or increases in liabilities, that result in decreases in equity,
other than those relating to distributions to holders of equity claims. E.g. cost of goods sold,
interest expense, rent expense.
4
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller maurits3. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $6.98. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
52510 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now