Lesson FA Financial Accounting Fundamentals - Concepts and Transaction Analysis Part 1

Transcription

1 Lesson FA Financial Accounting Fundamentals - Concepts and Transaction Analysis Part 1 This workbook contains notes and worksheets to accompany the corresponding video lesson available online at: Permission is granted for educators and students to make copies and redistribute this document without fee provided the copyright notice and page footer is retained. All other intellectual property rights are reserved by the copyright holder. Copyright 2011 by Rocky Spears Enterprises LLC, All Rights Reserved Page 1 of 25

2 Financial Accounting Fundamentals Concepts and Transaction Analysis Part 1 [Clip 01] The Conceptual Framework of Accounting Objectives The primary objectives of this lesson are: 1. To describe the conceptual framework of accounting 2. To describe the accounting equation 3. To describe debits and credits 4. To describe common account classifications 5. To illustrate basic financial transactions for a service business 6. To work a few sample problems involving basic financial transactions for a service business Scope of this Lesson: In this lesson we will briefly discuss the conceptual framework of accounting. This brief video regarding the conceptual framework of accounting is not intended to replace your textbook content. We provide it here as a brief foundation for other videos which follow. Be sure to use your textbook for a full understanding of basic concepts. Copyright 2011 by Rocky Spears Enterprises LLC, All Rights Reserved Page 2 of 25

3 Conceptual Framework of Accounting (continued) Sources of Standards: Historically, accounting standards have been established by professional accounting standards groups. These groups have evolved into the Financial Accounting Standards Board (FASB) in the United States and the International Accounting Standards Board (IASB) internationally. GAAP: The accounting standards in the U.S. are referred to as Generally Accepted Accounting Principles (GAAP). IFRS/iGAAP: International accounting standards are referred to as International Financial Reporting Standards (IFRS) or International GAAP (igaap). The source of the conceptual framework of accounting is the professional accounting standards groups, FASB and IASB. Note that the conceptual framework of accounting is evolving as FASB and IASB converge U.S. GAAP and International GAAP into a common international standard. Thus, depending on the date of publication of your textbook, the presentation of the conceptual framework may differ slightly. The basic elements and content, however, are the same. Further, it will be some years before the international standards are fully implemented and required in U.S. reporting. At present, it appears that full implementation in the U.S. will not occur until around the year 2015 at the earliest. Copyright 2011 by Rocky Spears Enterprises LLC, All Rights Reserved Page 3 of 25

4 Conceptual Framework of Accounting (continued) Conceptual Framework: The most recent pronouncement of the conceptual framework in 2008 can be described in twelve related points: 1. The objective of accounting is to provide financial information useful for making investment and lending decisions. 2. The financial information must be both (1) relevant to decision makers and must (2) represent the financial condition faithfully. 3. The financial information provided must be comparable across different organizations in the same accounting period and consistent with respect to past reporting for the same organization in previous accounting periods. In other words, the adopted standards for reporting financial information should be applied to ensure these characteristics result. 4. The financial information must be verifiable. Internal and external auditors provide skills and services to attest to the truthfulness of the financial statements. External auditors who are professionally qualified to express an opinion on the faithful representation of the financial statements are called Certified Public Accountants (CPAs). 5. The financial information must be timely, that is, provided early enough to be useful for decision makers. Financial statements for publicly held corporations, for example, are typically reported unaudited quarterly, while audited financial statements are provided annually within a few months of the end of the reporting period. Copyright 2011 by Rocky Spears Enterprises LLC, All Rights Reserved Page 4 of 25

5 Conceptual Framework (continued): 6. The financial information must be understandable. The way in which the financial information is reported should be such that financial decision makers can make sense of the information. Within the conceptual framework are two constraints which establish judgmental boundaries on the application of accounting standards. 7. The constraint of materiality governs whether financial information needs to be reported separately, or whether it can be consolidated with other financial information. 8. The cost (or cost-benefit) constraint governs the amount of effort and cost the organization should expend to be able to report financial information in detail. The cost of providing the information should not exceed the expected benefits to the users of the financial statements. The application of the accounting standards are also influenced by four basic assumptions. 9. The entity assumption defines the boundaries of the reporting unit for an organization. A reporting entity should not mix its financial reporting with other entities. For example, a sole proprietor of a business should separate personal financial information and accounting from the business s financial information and accounting including separate bank accounts, charge accounts, lines of credit, etc. 10. The going-concern assumption governs the application of accounting standards as though the organization is expected to continue operation in the future. If it is known that an organization is to be liquidated, the application of accounting standards may be different. Copyright 2011 by Rocky Spears Enterprises LLC, All Rights Reserved Page 5 of 25

6 Conceptual Framework (continued): 11. The historical cost principle establishes that assets should be recorded at their actual cost on the date of acquisition because the actual cost is both a verifiable amount and is free from bias. However, certain departures from this principle are allowed when objective measures of fair value are available for certain types of assets. 12. The stable monetary-unit assumption states that the monetary unit in use for reporting financial information is stable over time. We ignore inflation on the premise that inflation is relatively minor over time. Under this assumption, prior period financial statements are comparable on the basis of the monetary unit. Conceptual Framework of Accounting - Summary Objective: Useful for Decision Making Qualitative Characteristics: 1. Relevant 2. Faithful Representation 3. Comparable (across companies) and Consistent (over time) 4. Verifiable 5. Timely 6. Understandable Constraints: 1. Materiality 2. Cost (cost-benefit) Assumptions: 1. Entity 2. Going-concern 3. Historical cost 4. Stable monetary unit Copyright 2011 by Rocky Spears Enterprises LLC, All Rights Reserved Page 6 of 25

7 Preview The primary objectives of this lesson are: 1. To describe the conceptual framework of accounting 2. To describe the accounting equation 3. To describe debits and credits 4. To describe common account classifications 5. To illustrate basic financial transactions for a service business 6. To work a few sample problems involving basic financial transactions for a service business Copyright 2011 by Rocky Spears Enterprises LLC, All Rights Reserved Page 7 of 25

8 [Clip 02] The Basic Accounting Equation A = L + OE The Accounting Equation This clip will review the accounting equation. Accounting can be very difficult to learn, especially if you try to memorize everything. The best way to learn accounting is to memorize a few things, and then learn how to apply logical analysis from those few things rather than try to memorize everything. The accounting equation is something you need to memorize. Copyright 2011 by Rocky Spears Enterprises LLC, All Rights Reserved Page 8 of 25