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Lecture notes in financial accounting
what is financial accounting concepts and lecture notes on advanced financial accounting. how financial accounting helps in decision making pdf free download
CHAPTER 1: INTRODUCING FINANCIAL ACCOUNTING
I. IMPORTANCE OF ACCOUNTING
Accounting is the language of business and is
called this because all organizations set up an
accounting information system to communicate
data to help people make better decisions.
Accounting is a system
relevant, reliable, and comparable information about an organization’s business activities.
Identifying means selecting transactions and
events relevant to an organization.
Example: sale of iPods by Apple, receipt of
ticket money by TicketMaster.
Recording means keeping a chronological log
of transactions and events measured in
dollars and classified and summarized in a
Communicating means preparing accounting
reports such as financial statements, and analyzing and interpreting these reports.
Management Accounting provides information for decision-making activities of
management WITHIN the business.
Financial Accounting is concerned with providing useful information to those parties
OUTSIDE of the business.
Financial accountants are concerned with the preparation of Financial Statements, which are
distributed to outside parties in an annual report.
Most common experience with accounting is through: credit approvals, checking accounts,
tax forms, and payroll.
Financial Accounting Fundamentals, Ch. 1, Wild, 2009. Page 1
These common experiences are limited and tend to focus on the recordkeeping parts of
Recordkeeping/Bookkeeping—is recording of transactions and events, either manually or
electronically of an organization’s day-to-day activities. Recordkeeping is only ONE part of
Accounting—is the process of analyzing and drawing conclusions from this information.
Example: bookkeeper of a shoe store keeps the day-to-day records as to how many shoes are
sold and what bills need to be paid; accountant analyzes this data to evaluate the profitability
and health of the business.
A. Users of Accounting Information
1. External Information Users
External Users—are NOT directly involved in running the organization.
Examples: shareholders (investors), lenders,
directors, customers, suppliers, regulators, lawyers,
brokers, and the press.
External users have limited access to an
Financial Accounting Fundamentals, Ch. 1, Wild, 2009. Page 2
External users business decisions depend on information that is reliable, relevant, and
These financial statements are called general-purpose financial statements.
a. Lenders (creditors)
Loan money or other resources to an organization.
They look for information to help them assess whether an
organization is likely to repay its loans with interest.
Examples: banks, savings and loans, co-ops, and
mortgage and finance companies.
b. Shareholders (investors)
Owners of a corporation.
Use accounting reports in deciding whether to buy, hold, or
c. Board of Directors
oversees stockholders interests in an organization.
d. External (Independent) Auditors
Examine financial statements to verify that they are prepared according to
generally accepted accounting principles (GAAP).
e. Employees and Labor Unions
Use financial statements to judge the fairness of wages, assess
job prospects, and bargain for better wages.
Often have legal authority over certain activities of organizations.
Financial Accounting Fundamentals, Ch. 1, Wild, 2009. Page 3
IRS who requires organizations to file accounting reports in computing taxes.
Utility boards use accounting information to set utility rates.
g. Voters, Legislators, and Government Officials
Use accounting information to monitor and evaluate
government receipts and expenses.
Use accounting information to evaluate the use and impact of their donations.
Use accounting information to judge the soundness of a customer before
making sales on credit.
Use financial reports to assess the staying power of potential suppliers.
2. Internal Information Users
Internal Users—are those directly involved in managing and operating an
Managerial Accounting—area of accounting
that serves the needs of internal users.
Internal Controls—are procedures set up to
protect company property and equipment,
ensure reliable accounting reports, promote
efficiency, and encourage adherence to
Examples: good records, physical controls (locks, passwords, guards), and
Financial Accounting Fundamentals, Ch. 1, Wild, 2009. Page 4
a. Research and Development Managers
Need information about projected costs and revenues of any proposed changes
in products and services.
b. Purchasing Managers
Need to know what, when, and how much to purchase.
c. Human Resource Managers
Need information about employees’ payroll, benefits, performance, and
d. Production Managers
Depend on information to monitor costs and ensure quality.
e. Distribution Managers
Need reports for timely, accurate, and efficient delivery of products and
f. Marketing Managers
Use reports about sales and costs to target consumers, set prices, and monitor
consumer needs, tastes, and price concerns.
g. Service Managers
Require information on the costs
and benefits of looking after
products and services.
B. Opportunities in Accounting
We are influenced by accounting when we
earn money, pay taxes, invest savings,
budget earnings, and plan for the future.
Financial Accounting Fundamentals, Ch. 1, Wild, 2009. Page 5
There are accounting jobs in private accounting, public accounting, and government (and
Majority of the jobs are in private accounting, followed by public accounting.
Accounting specialists are highly regarded.
People with accounting knowledge are always in demand as they can help with financial
analysis, strategic planning, e-commerce, product feasibility analysis, information
technology, and financial management.
Demand for accounting specialists is boosting salaries, and can vary because of location,
company size, professional designation, experience, etc.
Accountants can possibly have great benefit packages that can include: flexible work
schedules, telecommuting options, career path alternatives, casual work environments,
extended vacation time, and child and elder care.
Examples of Accounting Specialists: Certified public accountant (CPA), certified
Financial Accounting Fundamentals, Ch. 1, Wild, 2009. Page 6
ed payroll professional (CPP),personal financial specialist (PFS), certified fraud examiner
(CFE), certified forensic accountant (CrFA)
II. FUNDAMENTALS OF ACCOUNTING
A. Ethics—A Key Concept
Ethics—are beliefs that distinguish right
from wrong; they are accepted standards of
good and bad behavior.
Goal of accounting is to provide useful
information for decisions.
So there must be ethics in accounting.
Old saying: “Good ethics are good
Providers of accounting information often
face ethical choices as they prepare financial
For example, these choices can affect the
price a buyer pays and the wages paid to
B. Generally Accepted Accounting Principles
GAAP—are rules that specify acceptable
GAAP aims to make information in financial
statements relevant, reliable, and
1. Setting Accounting Principles
Two main groups establish GAAP in the
a. Financial Accounting Standards Board (FASB)
Private group that sets both broad and specific principles.
Financial Accounting Fundamentals, Ch. 1, Wild, 2009. Page 7
b. Securities and Exchange Commission (SEC)
Government group that establishes reporting requirements for companies that
issue stock to the public.
International Accounting Standards Board (IASB)—issues International Financial
Reporting Standards (IFRS) that identify preferred accounting practices, for example,
when companies wish to raise money from lenders and investors in different countries.
2. Principles and Assumptions of Accounting
(1) General Principles—the basic assumptions, concepts, and guidelines for
preparing financial statements.
(2) Specific Principles—detailed rules used in reporting business transactions and
a. Accounting Principles
i. Cost Principle
Means that accounting information is based on
Cost is measure on a cash or equal-to-cash
Cash Example: cash is given for a service, its cost is measured as the amount of
Equal to Cash Example: if something besides cash is exchanged (i.e. truck), cost
is measured as the cash value of what is given up or received.
It emphasizes reliability and verifiability, and information based on cost is
Objectivity—information is supported by
independent, unbiased evidence; it demands more
than a person’s opinion.
Financial Accounting Fundamentals, Ch. 1, Wild, 2009. Page 8
ii. Revenue Recognition Principle
Revenue (sales)—is the amount received from
selling products and services.
Revenue Recognition Principle—provides
guidance on when a company must recognize
Recognize—means to record it.
If revenue is recorded too early, then a company
would look more profitable than it is.
If revenue is recorded too late, a
company would look less profitable
than it is.
Three important concepts:
1. Revenue is recognized when
2. Proceeds from selling products
and services need not be in cash
(can be credit sale).
3. Revenue is measured by the cash
received plus the cash value of
any other items received.
iii. Matching Principle
A company must record its expenses incurred to generate the revenue reported.
iv. Full Disclosure Principle
Requires a company to report the details
behind financial statements that would impact
b. Accounting Assumptions
i. Going-Concern Assumption
Accounting information reflects a presumption that the business will continue
operating instead of being closed or sold.
Financial Accounting Fundamentals, Ch. 1, Wild, 2009. Page 9
Think Energizer Bunny, it keeps going and going.
ii. Monetary Unit Assumption
We can express transactions and events in
monetary, or money units.
Money is the most common denominator in
iii. Time Period Assumption
Presumes that the life of a company can be
divided into time periods, such as months and years, and that useful reports
can be prepared for those periods.
iv. Business Entity Assumption
A business is accounted for separately from
other business entities, including its owner.
Separate information about each business is
necessary for good decisions.
By being conservative with the numbers.
C. Sarbanes-Oxley (SOX)
Congress passed this act to help curb financial abuses at companies that issue their
stock to the public.
It requires that the public companies apply other accounting oversight and stringent
Failure to comply can lead to financial penalties, stock market delisting, and criminal
prosecution of executives.
Management and Auditors must verify the effectiveness of internal controls.
Financial Accounting Fundamentals, Ch. 1, Wild, 2009. Page 10