Kế toán, kiểm toán - Chapter 2: Financial statements and accounting concepts/principles

CHAPTER 2FINANCIAL STATEMENTS AND ACCOUNTING CONCEPTS/PRINCIPLES©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinLearning Objectives1. What are generally accepted accounting principle?2. What kind of information is reported on each financial statement and how are the financial statements related?3. What are transactions? What is the meaning and usefulness of the accounting equation?4. What are meanings of the captions in the financial statements?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinLearning Objectives 5. Why is cash flow important?6. What are the limitations of financial statements?7. What is an annual report and why is it issued?8. What are some of the business practices related to organizations?©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinLearning Objective 1What kind of information is reported on each financial statement and how are the financial statements related?©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinFinancial StatementsResult of a process that begins with an economic eventThe event becomes a recorded transactionThe transaction becomes part of a firm’s financial statements©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinThe Financial StatementsBalance Sheet – financial position at the end of the periodIncome Statement – earnings for the periodStatement of Changes in Owners’ Equity – investments by and distributions to owners during the periodStatement of Cash Flows – cash flows for the period©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinTransactionsProcedures for sorting, classifying, and presenting (bookkeeping)Selection of alternative methods of reflecting the effects of certain transactions (accounting)Financial statementsProcess©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinLearning Objective 2What are transactions? What is the meaning and usefulness of the accounting equation?©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinTransactionsEconomic interchanges between entitiesExamples are:A saleA purchaseReceipts of cash by borrowerPayment of cash by lender©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinBalance SheetFinancial position at the end of a period - A snapshot at a point in timeAlso called Statement of Financial PositionContains three parts:AssetsLiabilitiesOwners’ EquityAssets = Liabilities + Owners’ Equity©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinLearning Objective 3What are the meanings of the captions in the financial statements? ©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinAssetsProbable future economic benefitsResources ownedCan be classified as current or long-term©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinExamples of AssetsCash – cash on hand or in banksAccounts Receivable – amounts due from customersMerchandise Inventory – merchandise acquired but not yet soldEquipment – assets used in the businessLess: Accumulated Depreciation – cost of equipment estimated to have been used up©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinLiabilitiesProbable future sacrifices of economic benefitsObligationsCan be classified as current or long-term©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinExamples of LiabilitiesAccounts Payable - amounts owed to suppliers of merchandise inventoryLong-term Debt – amounts borrowed but will not be repaid within one year©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinIncome StatementSummary of the earnings for a periodConsists of:RevenuesExpensesCovers a period of timeAlso called Statement of Earnings, or Profit and Loss Statement, or Statement of Operations©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinIncome Statement SectionsRevenues - operating activities for the period - often reported as Net SalesExpenses - Costs incurred in generating revenues©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinExamples of ExpensesCost of Goods Sold – total cost of inventory delivered to customers as a result of salesSelling, General, and Administrative Expenses – operating expenses of an entityInterest Expense – cost of using borrowed fundsIncome Taxes©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinMore Income Statement SectionsGross Profit – difference between sales and cost of goods soldIncome From Operations – an important measure of a firm’s activitiesIncome Before Taxes – incomefrom operations less interestexpense©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinMore Income Statement SectionsNet Income – income remaining after all expenses have been deductedNet Income Per Share of Common Stock Outstanding – used in measuring the market value of a share of common stock©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinStatement of Changes in Owners’ EquityAlso called Statement of Changes in Capital Stock, or Statement of Changes in Retained EarningsExplains the changes that occurred in the components of owners’ equity during the year©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinOwners’ EquityPaid-In CapitalCommon Stock - at par valueAdditional Paid-In Capital – difference between total amount invested by the owners and the par or stated value of the stockRetained Earnings – cumulative net income retained in the businessDividends – distribution of earnings to owners©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinLearning Objective 5Why is cash flow important? ©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinStatement of Cash FlowsSources and uses of cashCovers a period of timeIncludes:Operating ActivitiesInvesting ActivitiesFinancing Activities©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinCash Flows from Operating ActivitiesStart with Net IncomeAdd back Depreciation ExpenseDeduct (add) increases (decreases) in current assetsDeduct (add) decreases (increases) in current liabilities©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinCash Flows from Investing ActivitiesCash used to purchase long-lived assetsCash received from sales of long-lived assetsOther changes in cash investments©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinCash Flows from Financing ActivitiesCash raised from the sale of long-term debt and common stockCash paid to reduce long-term debt and stock outstanding©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinFinancial Statement RelationshipsAll financial statements are relatedNet Income from the Income Statement affects Retained Earnings on the Balance SheetThe Income Statement and theBalance Sheet affect theStatement of Cash Flows©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinLearning Objective 4What are generally accepted accounting principles? ©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinConcepts and PrinciplesAccounting Entity – entity for which financial statements are being prepared – can be a proprietorship, partnership, corporation, or group of corporationsGoing Concern – presumption that theentity will continue to operate in the futureUnit of Measurement – in the United States, the dollar is the measurement unit for all transactions©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinConcepts and PrinciplesCost Principle – transactions are recorded at their original cost as measured in dollarsObjectivity – a given transaction should be recorded in the same way in all situationsAccounting Period – the period of time selected for recording resultsMatching – expenses are matched with the revenues that produced them©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinConcepts and Principles Accrual Accounting – revenue recognized at the time of sale and expenses recognized when incurredConsistency – maintaining the method of accounting for a particular type oftransactionFull Disclosure – all necessary information is presented in the financial statements and notes so investors will not be misled©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinConcepts and Principles Materiality – absolute exactness is not necessary as long as not misleadingConservatism – make judgmentsand estimates that result in lowerprofits and asset valuations ratherthan higher profits and higher asset valuations©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinLearning Objective 6What are the limitations of financial statements? ©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinLimitations of Financial StatementsFinancial statements do not reflect qualitative economic variablesBalance sheet does not reflect current valuesEstimates are used in manyareas of accounting ©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinMore Limitations of Financial StatementsTwo firms may use different accounting methods, making comparisons difficultInflation is not included in accounting proceduresFinancial statements do not reflect opportunity costs©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinLearning Objective 7What is an annual report and why is it issued? ©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinAnnual ReportDistributed to shareholdersContains:Financial statementsExternal auditor’s reportFootnotes and explanatory commentsLetters from the CEO and president©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinLearning Objective 8What are some of the business practices related to organizations? ©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/IrwinBusiness PracticesOrganizing a businessSole proprietorshipPartnershipCorporationFiscal Year – annual reporting periodPar value – arbitrary value assigned to stock; no relationship to valueParent and subsidiary corporations – parent owns at least a majority of the stock of another corporation©The McGraw-Hill Companies, Inc., 2002McGraw-Hill/IrwinMcGraw-Hill/IrwinMcGraw-Hill/Irwin