ACCOUNTING ASW
SUMMER 2005
Mark Lang
OVERVIEW
• Overview of ASW
- work through syllabus
• Overview of accounting
- goals
- structure
- major financial statements
Basics
• What is a company?
• Why do companies exist?
• How large should a company be?
Role of Accounting
• The communication problem
- How to condense millions of transactions in a
meaningful way
• With whom does it communicate?
- Investors--debt and equity
- Employees--CEO, store manager, inventory
managers, other employees
- Taxing authorities--state and local
- Others (government, labor, etc.)
Financial Accounting
• Why do investors need information?
- What to invest in
- Performance of management
• separation of ownership and control
• What kind of information do they need?
- To forecast:
• the amount
• timing
• uncertainty of future cash flows
Investor Communication
• Problem:
- atomistic investors
- diversified investors
• Answer
- generally accepted accounting principles
(GAAP)
US GAAP
• Congress
• Securities and Exchange Commission
• Financial Accounting Standards Board
- American Institute of CPAs
- Emerging Issues Task Force, etc.
• IASB may change all that
Basic Statements
• Balance Sheet
– net worth
• Income Statement
– change in net worth through firm activities
• Statement of Cash Flows
– change in cash
• Notes to the Statements
• Audit Opinion
Balance Sheet
• Snap shot of the firm at period-end
• Most basic financial statement
- All others derive from it
- Assets
- Liabilities
- Owners’ Equity
Assets = Liabilities + Owners’ Equity
• Assets--provide future benefits to the firm
- cash or expected to provide cash in future
• current--cash, sold or consumed within
year
• noncurrent--held for longer periods
• Liabilities--creditor claims
- expected to require future cash outflows
• current--due within a year
• noncurrent--due later
• Owners’ Equity-- the residual
- contributed capital
- retained earnings
• RE05 = RE04 + NI05 - Dividends05 - Other05
• Other often includes share repurchases
• I’ll put repurchases and other in dividends for now
• Problem 1.22
Income Statement
• Derives from the balance sheet
- change in net assets due to operations
- assets = liabilities + retained earnings +
contributed capital
- RE05 = RE04 + NI05 - Dividends05
Net income = Revenue - Expense
• Revenues
- Sales
- Other
• Expenses
- Cost of Goods sold: WM—76% of revenues
- Selling, Gen. & Admin: WM—18% of rev.
- Other: WM—0% of rev.
- Income Tax Expense: WM—2% of rev.
• Problem 1.19
Statement of Cash Flows
• Derives from the balance sheet
- Explains change in cash = Cash05 – Cash04
- Generally begins with net income
- Sections
• Operating
• Investing
• Financing
• Problem 1-29, 1-34
Other Disclosures
• Notes to the financial statements
– accounting policies and details on accounts
• Audit report
• Management’s discussion and analysis
• Segment reporting
– geographic and industry segments
• Quarterly results
• Five-year summary