This is a comprehensive and detailed Summary of all the accounting concepts for the final exam.
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Week 1 Accounting Main Points
Learning Objectives: Textbook answers and notes
● Discuss the different classifications of financial transactions
○ Financing Activities
■ Those transactions that raise funds for the company to operate or
expand.
■ Debt and Equity Investors
○ Investing Activities
■ Transactions in which the company is investing in assets that it will
use in its business operations.
■ Companies often need to purchase land, buildings, and equipment
to help them operate the business. These are called “fixed assets”.
■ Transactions that are classified as investing activities are
purchases made of property that is (1) likely to last a number of
years and (2) expected to be used in the operations of the business
rather than sold as part of the company's general operations.
■ This category of investing activities does not include any items that
were purchased for resale.
○ Operating Activities
■ All the other transactions that a business engages in which cannot
specifically be classified as financing or investing. Ex. payment of
rent, salaries, and insurance expenses.
■ Essentially any cash transaction that cannot specifically be
classified as a financing activity or an investing activity.
● Define an equity investor and a debt investor and understand the difference
○ Equity Investor (Stockholder)
■ They purchase stock in the company that the company uses in its
business operations. They then hope to receive dividends or for the
, stock price to increase in order to make money however, neither
are guaranteed.
○ Debt Investor (Creditor)
■ Companies can borrow money from investors or banks to fund their
business operations. However, they must sign a contract agreeing
to repay the borrowed money plus interest. The requirements are
spelled out on an agreement called a loan contract
■ The loan contract specifies a maturity date ( the date in which the
loan is to be repaid), interest that will accrue, and “collateral” which
refers to the assets that are pledged by the borrower to the creditor
if the borrower is not able to repay the loan. The requirements or
“terms” specified in a loan contract may vary.
○ Debt and Equity investors differ in the fact that Equity investors become
owners of the business, but debt investors do not. Equity investors may
benefit if the company is successful and the stock price increases but they
can also be hurt if the stock price drops. Creditors on the other hand
always get their money.
● Discuss the role of the Securities and Exchange Commission
○ Purpose is to maintain fair and truthful capital markets.
○ Their coverage only extends to “publicly-held corporations”.
○ A corporation is “publicly-held” if its stock is traded on an exchange, such
as the New York Stock Exchange or NASDAQ.
○ They require corporations to file a 10K yearly which is an audited financial
report and a 10Q quarterly which is an unaudited financial report covering
the most current quarter.
○ These are SEC forms that help analysts analyze and compare various
companies.
● Understand the basic terms surrounding auditing
, ○ Both the Form 10K and the financial statement included in the company’s
annual report are required to be audited by an “independent auditor”.
(external auditor)_
○ This is someone from an accounting firm that specializes in public
accounting
○ External auditors performing the audit must be independent oif the
company they are auditing.
○ Auditors are independent if they
■ Are not employees of the company they are auditing
■ Do not own a substantial investment in the company.
○ An audit is one of the most common services provided by a Certified
Public Accountant (CPA’s).
○ In general and in accounting, to audit an entity means to thoroughly
examine the bookkeeping records, financial accounts, and the policies and
procedures of that entity. An “entity” could be a business, trust, or
governmental unit.
○ Many companies also have internal auditors. These auditors are
employed by the company, and they audit departments within the
company. While these people are not independent they typically report
directly to tmop management as well as the audit committee which gives
them considerable power.
● Define corporate governance
○ Mechanisms in place within a company which inspire managers to report
the truth in their financial statements.
○ There are three ways society exerts pressures on management which
encourages them to maintain strong corporate governance
■ The reputation of the managers and the business. In business it is
important to have a good reputation, and generally neither
managers nor auditors want to risk damaging theirs.
, ■ Threat of legal liability. In recent years managers have increasingly
been held responsible when their company breaks the law.
■ Ethics. An ethical company is one that operates and reports in a
clear and truthful manner. It is simply the right thing to do. Most
successful companies have found that being ethical is the most
profitable way to operate.
● Discuss GAAP and IFRS and the concept of rules-based versus
principles-based
○ These are the accounting principles in both America (GAAP) and the for
the most part the rest of the world (IFRS)
○ The SEC requires that publicly-held companies based in the United States
prepare financial statements using GAAP. External auditors verify this and
report on it in their annual audit report accompanying the financial
statements.
○ The goal of GAAP has been to establish rules so that outside readers of
financial statements can trust that the statements from different companies
will be comparable. Because GAAP gives specific direction for how to
account for all types of transactions, it is called a “rules-based” system.
○ The International Financial reporting Standards (IFRS) standards are
relatively new but are gaining momentum in countries around the world.
Used in over 100 countries.
○ The main difference is that the IFRS gives substantially less guidance and
relies on interpretation to be handled on an individual basis by the
preparers of the statements and their external auditors. Because of this,
IFRS is considered a “principles-based” standard.
○ The U.S. GAAP also contains the underlying principles, but while the IFRS
stops there, GAAP goes on to prescribe the exact way the principles
should be applied.
● Discuss the roles of the board of directors and the audit committee
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