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Week 2

by: Petey Martin

Week 2 ACC 201

Petey Martin
GPA 3.25

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Week 2 of Notes for ACC 201 - Financial Accounting.
Class Notes
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This 5 page Class Notes was uploaded by Petey Martin on Monday September 28, 2015. The Class Notes belongs to ACC 201 at University of Rochester taught by WOJDAT K in Summer 2015. Since its upload, it has received 63 views. For similar materials see FINANCIAL ACCOUNTING in Accounting at University of Rochester.


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Date Created: 09/28/15
Petey Martin Notes 9815 0 Management Discussion and Letter to Shareholders 0 Letter to shareholders typically gives an overview of the business as well as a discussion of plans for the future 0 Financial Statement Notes 0 An integral part of the nancial statements and a key element to understanding nancial statements Which accounting alternatives are used Additional detail about a line in the nancial statements Things not included in any of four primary statements 0 Generally Accepted Accounting Principles GAAP o GAAP are the measurement rules and accepted procedures that organizations in the US follow in preparing the above statements 0 Securities Act of 1933 and Securities Exchange Act of 1934 were passed into law in response to the stock market crash of 1929 Gave Securities and Exchange Commission SEC power to make rules governing preparation of nancial statements for rms that have stock trading in US markets SEC has delegated aspects of this authority to private sector CPA s current the Financial Accounting Standards Board FASB Speci c GAAP rules have important implications to rms 0 Rules included as part of GAAP are often a compromise O Differences between International Financial Reporting Standards IFRS as promulgated by the International Accounting Standards Board IASB and US GAAP are being reconciled Compliance with GAAP 0 Financial statements would have decreased value without a means of policing what is included in them 0 Management represented by the highest of cer and the highest nancial of cer of the company of cially bears primary responsibility for the accuracy of the nancial statements Sets up a system of internal controls to protect the rm in part by ensuring the accuracy of the rm s nancial information Establishes audit committee on board of directors which should be comprised of independent directors External auditors hired 0 External independent auditors are hired to attest that Financial Statements have been prepared according to the rules Conduct audits to verify that nancial statements represent what they claim and conform to GAAP External auditors are considered independent in legal sense Users of nancial statements have successfully sued external auditors for damages caused to them by a reliance on audited nancial statements that were incorrect Auditor s reputation is valuable to them so they have incentives to work on public s behalf Nevertheless it is often dif cult for auditors to uncover fraud that involves the top of cers of a company 0 Failure to comply with GAAP can lead to misleading nancial statements 0 Financial statements may all be incorrect Petey Martin Notes 91015 0 Objective of Financial Accounting 0 Primary objective of external nancial reporting is to communicate information about a rm to external users such as creditors investors advisors customers suppliers and other decision makers that helps them make sound nancial decisions Qualitative Characteristics of Financial Reporting Information 0 Qualitative Characteristics Relevance Faithful Representation Qualitative Characteristics related to above Timeliness Understandability Veri ability Other Qualitative Characteristics Comparability Consistency Principles Followed 0 Cost Principle Assets are initially recorded in the accounts at their cost amount of cash given plus current dollar value of non cash consideration given in exchange for the asset o FullDisclosure Principle Financial statements must be complete 0 Revenue Realization Principle Revenue is recorded when earned provision of goods or services essentially complete and collection probable o Expense Matching Principle Expenses are recorded in the same period as the revenue they give rise to o Exceptions to reduce the volume of information and the cost of providing it 0 Cost Effectiveness information should be reported only when the bene t to the user outweighs the cost of providing the information o Materiality Small amounts are recorded with a focus on cost bene t ie the technical rules may not be adhered to for small amounts that are not likely to in uence decisions 0 Conservation When options exist and no choice is best asset values and revenue should not be overstated and liability values and expenses should not be understated to offset managers natural optimism Assumptions 0 Separate Entity Assumption All statements presented are for each organization as a separate entity 0 Stable Monetary Unit Assumption each business entity will report its results in terms of its national monetary unity wo adjusting for in ation 0 Continuity Assumption Financial statements assume the business entity will continue to operate into the future 0 Time Period Assumption Assumes a rm can report operations for year 1 year 2 year 3 etc in a meaningful way Accounts are the fundamental building blocks that capture nancial information for later aggregation into the 4 nancial statements Transactions refer to economic events 0 Transactions can be External lnvolve exchanges between the business and other parties lnternal lnvolve changes in nancial statement items caused by passage of time eg using up insurance depreciation and other adjustments or caused by events occurring within the reporting company itself eg re loss Journal Entries are the means by which past transactions are recorded in the accounts 0 Double Entry System duality of effects Left side totals are always offset by right side totals in every entry 0 Left side debit Debit increases assets Debit decreases liabilities or stockholders equity 0 Right Side credit Credit decreases assets Credit increases liabilities or stockholders equity T accounts are one method of summarizing journal entries 0 As a group the accounts are called the general ledger 0 Normally asset accounts have debit balances while liability and stockholders equity accounts have credit balances Balance Sheet presents a rm s asset liabilities and stockholders equity as a point in time o Assets probable economic bene ts resources owned by a corporation or other organization as a result of past transaction o Liabilities probable future sacri ces owed by a corporation or other organization to creditors arising as a result of past transactions


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