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Financial Accounting
Textbook: Spiceland 4th Edition
Chapter1: A Framework for Financial Accounting

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Part A

Accounting as a Measurement/
Communication Process

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Learning Objective 1

Describe the two primary functions of


financial accounting

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Accounting
A system of maintaining records of a companys
operations and communicating that information to
decision makers

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Accounting Information
Managerial accounting: information provided for
internal users
Financial accounting: information provided for
external users

Internal users

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Primary Functions of Financial


Accounting
Measure business activities
Communicate measurements for decision
making

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Illustration 1.2Framework for


Financial Accounting

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Learning Objective 2

Understand the business activities that


financial accounting measures

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Business Structure
Sole proprietorship: business is owned by one
person
Partnership: business is owned by two or more
persons
Corporation: business is legally separate from its
owners
Owner-manager separation typical
Limited liability of stockholders
Double taxation

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Business Activities
Financing activities Investing activities

Business
Involves Activities Involves
funding from purchase and
external sale of long-
sources term resources
Operating activities

Involves
transactions in
primary
operations of
business
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Basic Accounting Equation


Explains resources and their claims

Measure Profitability
Revenues Expenses = Net income (loss)

Dividends: distributions to owners


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Business Activities and


Their Measurement

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Learning Objective 3

Determine how financial accounting information is


communicated through financial statements

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Communicating Through
Financial Statements
Primary financial statements
Income statement
Statement of stockholders equity
Balance sheet
Statement of cash flows

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Income Statement
Reports the companys revenues and expenses
over an interval of time
Shows whether revenues were enough to cover
expenses (Profitability)

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Illustration 1.5Income Statement

Revenues Expenses = Net income (loss)

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Statement of Stockholders Equity

Summarizes the changes in stockholders


equity over an interval of time

Stockholders Equity (Owners Claims)


= Common Stock + Retained Earnings

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Illustration 1.6Statement of Stockholders


Equity

Ending Balance of Retained Earnings = Beginning balance of Retained


Earnings + Net Income - Dividends

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Balance Sheet

Presents the financial position of the


company on a particular date

Assets = Liabilities + Stockholders Equity

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Illustration 1.7Balance Sheet

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Statement of Cash Flows


Measures activities involving cash receipts and
cash payments over an interval of time

Can be classified into three categories

Operating Investing Financing


cash flows cash flows cash flows

Not required by our course!

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Illustration 1.8Statement of Cash Flows

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Illustration 1.9Links among Financial
Statements

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Learning Objective 4

Describe the role that financial accounting plays in


the decision-making process

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Illustration 1.10Use of Financial Accounting 1-25

Information in Investing and Lending


Decisions

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Part B

Financial Accounting Information

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Learning Objective 5

Explain the term generally accepted accounting


principles (GAAP) and describe the role of GAAP in
financial accounting

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Rules of Financial Accounting

make their decisions


based on
Investors & Financial Accounting
Creditors Information
Should be based
on formal
standards

Generally Accepted Accounting Principles


(GAAP)

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Current Standard Setting


United States Global

Financial Accounting International Accounting


Standards Board (FASB) Standards Board (IASB)

Governed by
Securities and Exchange
Commission (SEC)

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Role of Auditors
Trained individuals hired by a company as an
independent party to verify accuracy of that
companys financial statements
Role of auditors

Help ensure that Help investors and


management has in fact creditors in their decisions
appropriately applied GAAP by adding credibility to
in preparing the companys the financial statements.
financial statements

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Objectives of Financial
Accounting
Financial accounting should provide information
that:
Is useful to investors and creditors in making
decisions
Helps to predict cash flow
Tells about economic resources, claims to
resources, and changes in resources and claims

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Part C

Careers in Accounting

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Learning Objective 6

Identify career opportunities in accounting

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Illustration 1.14Some Career


Options

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Illustration 1.14Some Career


Options

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Learning Objective 7

Explain the nature of the conceptual framework


used to develop generally accepted accounting
principles

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What is Conceptual Framework


Conceptual
Framework

GAAP (Generally
Accepted
Accounting
Principles)

Financial
Statements

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Conceptual Framework
Appendix
Qualitative characteristics
Enhancing qualitative characteristics
Cost effectiveness constraint
Underlying assumptions

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Illustration 1.15Qualitative Characteristics


of Useful Financial Information

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Cost Effectiveness Constraint


Cost constraint suggests that:
Financial accounting information is provided only
when the benefits of doing so exceed the costs

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Underlying Assumptions
Economic Entity Monetary Unit
Assumption Assumption

Identify all economic events


Need a unit or scale of
with a particular economic
measurement
entity

Periodicity Going Concern


Assumption Assumption

Provide information of an
Business entity will continue
enterprise at regular time
to operate indefinitely
periods

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Summary
Describe the two primary functions of financial
accounting
Understand the business activities that financial
accounting measures
Determine how financial accounting information is
communicated through financial statements
Describe the role that financial accounting plays in
the decision-making process

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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Summary
Explain the term generally accepted accounting
principles (GAAP) and describe the role of GAAP
in financial accounting
Identify career opportunities in accounting
Explain the nature of the conceptual framework
used to develop generally accepted accounting
principles

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End of Chapter 1

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