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Summary Accounting Chapter 1 - 5 (book + notes + slides)
This is a summary covering the chapters 1 - 5 of the book.
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AccountingChapter 1
Basic activities
1. Identifying (the economic events relevant to a business)
2. Recording (in order to provide a history of its financial activities)
3. Communicating (the collected info to interested users by means of acc reports)
a. Analysing
i. Use of ratios, percentages, graphs and charts to highlight financial
trends and relationships
b. Interpreting
i. Explaining the uses, meaning and limitations of reported data
Financial reporting
= Public communication whereby an entity provides information about financial position,
financial performance and cash flows (= end point of accounting)
External & internal users: looking at financial reporting from a specific perspective
Translates into two different views in accounting frameworks:
- historical cost approach1 - what was the price paid/received. E.g. Belgian Gaap
- fair value approach2 – what is the current value. E.g. International Financial
Reporting Standards
Selection of which principle to follow relates to trade-offs between relevance and faithful
representation.
Relevance = fin info is capable of making a difference in a decision
Faithful representation = the numbers and descriptions match reality, they are factual
Groups of financial info users
1. Internal users
a. Managers who plan, organize and run the business
b. Marketing managers, production supervisors, finance directors, company
officers
2. External users
a. Individuals and organisations outside a comp who want financial info about
the comp
b. Investors: use acc info to decide whether to buy, hold or sell shares of a comp
c. Creditors: use acc info to evaluate the risks of granting credit or lending
money
Questions internal/external users ask
Internal External
Finance Is cash sufficient to pay Investors Is the comp earning
dividends to “” shareholders? satisfactory income?
Marketing What price should be Investors How do two comp’s
charged to maximize the compare in size?
comp’s net income?
1
The comp’s record assets at their costs, this is true not only when the assets are purchased but also over the
time they are held
2
Assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability)
1
, HR Can the comp afford pay Creditors Will the comp be able to pay
raises this year? its debts as they come due?
Management Which product line is the
most profitable, should any
product lines be eliminated?
=> financial acc answers these questions
Ethics in Financial reporting
Ethics = the standards of conduct by which actions are judged as right or wrong,
honest/dishonest, fair/not fair, etc
Analysing ethics cases
1. Recognize an ethical situation and the ethical issues involved
2. Identify and analyse the principal elements of the situation
a. Identify the stakeholders (person/group) who may be harmed
3. Identify the alternatives, and weigh the impact of each alternative on various
stakeholders
Accounting standards
Primary acc standard-setting bodies
1. International acc standards board (IASB)
2. Financial acc standards board (FASB)
IFRS – International Financial Reporting Standards (EU standard)
- International Accounting Standard Board (https://www.ifrs.org/)
- Independent organisation
- Global convergence local accounting to IFRS?
o https://www.ifrs.org/use-around-the-world/use-of-ifrs-standards-by-
jurisdiction/
- Principle based
o not a ‘cookbook’
o not sector specific
o in case principles laid down by standard are unclear additional guidance via
‘interpretations’ regular amendments / updates !!
GAAP = generally accepted acc principles (US standard)
- Financial Accounting Standard Board (https://www.fasb.org/home)
- recognized by the U.S. Securities and Exchange Commission as the designated
accounting standard setter for public companies
- Rules based
Assumptions/(consolidated)3 financial statements
1. Monetary unit assumption
2. Economic entity assumption
3
Consolidated = two or more entities
2
, Monetary unit assumption
= comp’s should only include transaction data that can be expressed in money
- This assumption enables accounting to quantify economic events
- This assumption is vital to applying the historical cost principle
- This assumption prevents the inclusion of some relevant info in the acc records
Going concern
- Preparation financial statements
- Assumption that entity continues in business for the foreseeable future (at least 12
months)
- So: entity has no intention or need to enter in liquidation or cease trading
Periodicity (or frequency)
- Annual, half-year, quarterly, etc.
o Via regulation: e.g. ESMA (European Securities and Markets Authority)
o Other requirements: e.g. stock exchange
- Fiscal year versus reporting year
Economic entity assumption
Eco ent = org or unit in society, it may be a comp, a governmental unit, a municipality or a
temple
- The eco ent requires that the act of the ent be kept separate and distinct from the
act of its owner and all other eco ent’s
Proprietorship Partnership Corporation
Owned by one pers Owned by two or more pers Ownership divided into
shares
3
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