GAAP in Accounting

8/10/2019 GAAP in Accounting

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The McGraw-H il l Companies, Inc., 2006McGraw-Hill/Irw2in

Accounting inBusiness


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Learning objectives

Conceptual:C1: Explain the purpose and importance of accounting

in the information age.

C2: Identify users and uses of accounting.

C3: Identify opportunities in accounting and relatedfields.

C4: Explain why ethics are crucial to accounting.

C5: Explain the meaning of GAAP, and define and

apply several key principles of accounting.

Analytical:

Define and interpret the accounting equation and each

of its components.


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Learning objective

C1: Explain the purpose and importance

of accounting in the information age.


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Identifies

Records

CommunicatesRelevant

Reliable

Comparable

Importance of Accounting

Accountingis a

system that

information

that is

to help users make

better decisions.


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7/41 The McGraw-H il l Companies, Inc., 2006McGraw-Hill/Irw7in

What is the relation between accountingand bookkeeping?

Bookkeeping is the recordingof financial

transactions and events, either manually or

electronically.

Accounting is much more. It includes

identifying, measuring, recording, reporting,

and analyzingbusiness events and

transactions, and helps information users tomake economic decisions.



Learning objective

C2: Identify users and uses of

accounting.



Users of Accounting Information

External Users

Lenders

Shareholders

Governments

Consumer Groups

External Auditors

Customers

Internal Users

Managers

Officers

Internal Auditors

Sales Staff

Budget Officers

Controllers



Users of Accounting Information

External Users

Financial accountingprovides

external users with financial

statements.

Internal Users

Managerial accountingprovides

information needs for internal

decision makers.



Users of Accounting Information-External

Lenders: Whether the firm (borrower) canrepay the money?

Shareholders: whether to buy, hold, or sell

stocks? Governments: whether the firm pay all due

tax?

Customers: whether the firm can exist toprovide post-sale services?

External Auditors: whether the financialstatements are prepared according to GAAP?

Etc.



Users of Accounting Information-Internal

Marketing managers: target customers, set

price, monitor sales.

Production managers: monitor cost and ensure

quality.

Purchasing managers: what, when and where

to purchase materials.

Human resource managers: employees

performance and compensation.



Learning objective

C3: Identify opportunities in accounting

and related fields.



Opportunities in Accounting

Financial

Preparation

Analysis

Auditing

Regulatory

ConsultingPlanning

Criminal

investigation

Managerial

General accounting

Cost accounting

Budgeting

Internal auditing

ConsultingController

Treasurer

Strategy

Taxation

Preparation

Planning

Regulatory

Investigations

ConsultingEnforcement

Legal services

Estate planning

Accounting-

related

Lenders

Consultants

Analysts

Traders

Directors

Underwriters

Planners

Appraisers

FBI investigators

Market researchers

Systems designers

Merger services

Business valuation

Human services

Litigation support

Entrepreneurs


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Learning objective

C4: Explain why ethics are crucial to

accounting.


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Beliefs that

distinguish

right fromwrong

Accepted

standards of

good and badbehavior

Ethics

EthicsA Key Concept


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Identify

ethical concerns

Analyze

options

Make ethical

decision

Use personalethics to

recognize ethical

concern.

Consider all goodand bad

consequences.

Choose bestoption after

weighing all

consequences.

Guidelines for Ethical Decision Making


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Learning objective

C5: Explain the meaning of GAAP, and

define and apply several key principles

of accounting.


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Financial accounting practice is governed by

concepts and rules known as generally accepted

accounting principles (GAAP).

Generally Accepted AccountingPrinciples

Relevant

Information

Affects the decision of

its users.

Reliable Information Is trusted by

users.

Comparable

Information

Is helpful in contrasting

organizations.


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The Securities and Exchange Commission[USA]is the government group that

establishes reporting requirements for

companies that issue stock to the public.

Setting Accounting Principles

Financial Accounting

Standards Boardis the private

group that sets both broad and

specific principles.


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Setting Accounting Principles

Hong Kong:

Hong Kong Institute of Certified Public

Accountants(HKICPA)

China

Ministry of Finance Peoples Republic of China

International Accounting Standard Board

(IASB)

International Financial Reporting Standards

(IFRS)
http://www.hkicpa.org.hk/http://www.hkicpa.org.hk/http://www.hkicpa.org.hk/http://www.hkicpa.org.hk/


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Principles of Accounting

General principles: basic assumptions,

concepts, and guidelines for preparing

financial statements.

Usually stem from long-used accounting

practice.

Specific principles: detailed rules used in

reporting business transactions and events.Usually created by a pronouncement from an

authoritative body.


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Principles of AccountingGeneralPrinciples

Objectivity Principle

Accounting information is supported by independent,

unbiased evidence. It is intended to make financial

statements useful by ensuring they report reliable and

verifible information.

Source documents.


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Cost Principle

Accounting information is based on actual cost.Cost is measured on a cash or equal-to cash basis

Information based on cost is

considered objective.


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Monetary Unit Principle

Express transactions and events in monetary, or

money, units.


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Revenue Recognition PrincipleProvides guidance on when a company must recognize

revenue.

1.Recognize revenue when it is earned.

2.Proceeds need not be in cash (Credit sales).3.Measure revenue by cash received plus cash

value of items received.


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Business Entity Principle

A business is accounted for separately from

other business entities, including its owner.


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Business Entity Forms

Proprietorship Partnership Corporation

Exh.


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Characteristics Proprietorship Partnership Corporation

Business entity yes yes yes

Legal entity no no yesLimited liability no no yes

Unlimited life no no yes

Business taxed no no yes

One owner allowed yes no yes

*

* Proprietorships and partnerships that are set up as LLCs

provide limited liability.

Characteristics of Businesses

Exh.

1.8

*


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Owners of a corporation are called

shareholders(or stockholders).

When a corporation issues only

one class of stock, we call it

common stock (or capital stock).

Corporation


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Learning objective

Define and interpret the accounting

equation and each of its components.


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Assets

Liabilities

& Equity

Accounting Equation

Liabilities EquityAssets = +


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Accounting Equation

Assets are resources with future benefits that are owned

or controlled by a company.

Liabilities are what a company owes its creditors in future

products or services.

Equity refers to the claims of its owner(s).

Forms of funds=Sources of funds ()

What resources does the firm have? (Assets) = Where

do those resources come from? (Liabilities and Equity)

A firm acquires assets by funds. Liabilities and equity

are the sources of funds to acquire those assets.


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Land

Equipment

Buildings

Cash

Vehicles

Store

Supplies

Notes

Receivable

Accounts

Receivable

Resourcesowned or

controlled

by a

company

Assets


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Taxes

Payable

Wages

Payable

Notes

Payable

Accounts

Payable

Creditors

claims on

assets

Liabilities


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Ownersclaims

on

assets

Revenues

Owner

Investments

Owner

Withdrawals

Expenses

Equity


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Liabilities EquityAssets = +

Expanded Accounting Equation

Revenues ExpensesOwner

Capital

Owner

Withdrawals_

+_


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Expanded Accounting Equation

Revenues: gross increase in equity from a

companys earnings activities.

Expenses: the cost of assets or services used

to earn revenue. Expenses decrease owners

equity.

Owner investments: the assets an owner puts

into the company. Owner withdrawals: the assets take away from

the company for personal use.


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End of Chapter 1


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Chapter 1 Homework

Ex. 1-1,1-2,1-7

Problem 1-1A

Due on June 12, 2006 (Monday)

GAAP in Accounting

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