Kế toán, kiểm toán - Chapter 2: Investing and financing decisions and the balance sheet

Investing and Financing Decisionsand the Balance SheetChapter 2Understanding the BusinessTo understand amounts appearingon a company’s balance sheet weneed to answer these questions:What businessactivities causechanges inthe balancesheet?How dospecificactivitiesaffect eachbalance?How do companieskeep track ofbalance sheetamounts?The Conceptual FrameworkQualitative CharacteristicsRelevancyReliabilityComparabilityConsistencyElements of StatementsAssetLiabilityStockholders’ EquityRevenueExpenseGainLossObjective of Financial ReportingTo provide useful economic information to external users for decision making and for assessing future cash flows.Qualitative CharacteristicsRelevancyReliabilityComparabilityConsistencyElements of StatementsAssetLiabilityStockholders’ EquityRevenueExpenseGainLossObjective of Financial ReportingTo provide useful economic information to external users for decision making and for assessing future cash flows.Elements of StatementsAssetLiabilityStockholders’ EquityRevenueExpenseGainLossThe Conceptual FrameworkPrimary CharacteristicsRelevancy: predictive value, feedback value, and timeliness.Reliability: verifiability, representational faithfulness, and neutrality. Secondary CharacteristicsComparability: across companies.Consistency: over time.Qualitative CharacteristicsRelevancyReliabilityComparabilityConsistencyElements of StatementsAssetLiabilityStockholders’ EquityRevenueExpenseGainLossObjective of Financial ReportingTo provide useful economic information to external users for decision making and for assessing future cash flows.The Conceptual FrameworkAsset: economic resource with probable future benefits.Liability: probable future sacrifices of economic resources.Stockholders’ Equity: financing provided by owners and business  operations.Revenue: increase in assets or settlement of liabilities from ongoing operations.Expense: decrease in assets or increase in liabilities from ongoing operations.Gain: increase in assets or settlement of liabilities from peripheral activities.Loss: decrease in assets or increase in liabilities from peripheral activities.International PerspectiveReconsidering the Conceptual FrameworkObjective of Financial Reporting: To provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions in their capacity as capital providers.Qualitative Characteristics (limited by materiality and costs): Fundamental (to be useful): Enhancing (degrees of usefulness):  Relevance  Comparability  Faithful representation  Verifiability  Timeliness  UnderstandabilityThe Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are working on a joint project to develop a common conceptual framework toward convergence of accounting standards. Elements of the Balance SheetA = L + SE(Assets)(Liabilities)(Stockholders’ Equity)Economic resources with probable future benefits owned or controlled by the entity. Measured by the historical cost principle.Probable debts or obligations (claims to a company’s resources) that result from a company’s past transactions and will be paid with assets or services. Entities that a company owes money to are called creditors.The financing provided by the owners and by business operations. Often referred to as contributed capital.Papa John’s Balance SheetNature of Business Transactions Most transactions with external parties involve an exchange where the business entity gives up something but receives something in return.AccountsCashEquipmentInventoryNotes PayableAn organized format used by companies to accumulate the dollar effects of transactions.Chart of AccountsA chart of accounts lists all account titles and their unique numbers. Principles of Transaction AnalysisEvery transaction affects at least two accounts (duality of effects).The accounting equation must remain in balance after each transaction.A = L + SE(Assets)(Liabilities)(Stockholders’ Equity) Balancing the Accounting EquationStep 1: Identify and classify accounts and effectsIdentify the accounts (by title) affected and make sure at least two accounts change.Classify them by type of account. Was each account an asset (A), a liability (L), or a stockholders’ equity (SE)?Determine the direction of the effect. Did the account increase [+] or decrease [-]?Step 2: Verify account equation is in balance.Verify that the accounting equation (A = L + SE) remains in balance. How Do Companies Keep Track of Account Balances?General JournalT-accountsGeneral LedgerEnd of Chapter 2