Hello and welcome welcome to FAR.
Financial accounting and reporting.
Roger Philipp, right and make sure incidentally if you haven�t already watched the intro
section, it's like 45, 50 minutes long.
It talks about the exam in general and then there's also a couple minutes that�s specifically
about the financial accounting and reporting exam or the FAR.
Far, a long long way to run.
Alright.
Starting out here we�re talking about the conceptual framework for accounting, and then
after that we�ll talk about IFRS, international financial reporting standards.
Starting out with the conceptual framework, the FASB established the conceptual framework.
It is a of determining and defining the objectives and concepts that underlie financial reporting.
Now when we talk about financial reporting, and we�re talking about these financial
statements, for those of you that are studying for the audit exam, you'll hear this again
and again.
Whose statements are these?
Management.
Management is responsible for the preparation of these things, management is responsible
for the content.
Our job as an auditor should we decide to accept it, is to obtain sufficient appropriate
audit evidence in order to corroborate the assertions, and then to finally give an opinion
on these financial statements taken as a whole.
So what we�re trying to do is we�re trying to go and give an opinion.
That's what an audit is.
Here in financial accounting and reporting, FAR, what are we dealing with?
We're talking about, what are these financial statements?
What are the concepts?
What are the objectives that underlie these basic financial statements?
You�ll see here it says, in looking at these financial statements, we start out with a
couple of primary objectives of these financial statements.
And basically what it says is we're trying to focus on what is important to the users
of the statement, the users of these financial statements.
When we talk about defining things like materiality, it means how significant, how important something
is for these particular users in relation to the entire financial statements.
Starting out with these statements, it says there are several or six primary objectives
of financial reporting.
First of all, to provide information that is useful to the existing and potential, so
the current and the future investors, lenders and creditors.
So what we're looking at is, investors, people that want to invest or buy stock in the company,
lenders, people that are going to loan us money and then all of these creditors.
So all of these are people that are concerned with the specific financial statements.
A second primary objective is the information that talks about the economic resources and
the claims against those resources.
And the economic resources claims that would be our balance sheet or a statement of financial
position.
We�ve got our ch-ch-ch-changes.
Right?
Changes in economic resources and claims to those.
The changes would be like the income statement because an income statement would be this
year only, where the balance sheet is cumulative, all the years, how much cash at the beginning,
and how much cash at the end.
That�s cumulative cash, whereas your income sales, costs of goods sold, net income, that�s
going to be this year only changes.
Financial reporting related to accrual accounting, and accrual accounting basically says that
we�re using accrual versus cash.
Because remember, it�s an accrual world.
Ha ha ha.
Get it?
Accrual.
So what is accrual accounting versus cash?
Cash says you give me a hundred dollars because I performed the services.
You have not paid me yet, so I debit receivable credit sales revenue.
So I do have a revenue even though I haven�t touched the cash.
So you�ll see cash versus accrual, cash versus accrual.
We�re going to talk down the road about a statement of cash flow.
We�re going to talk down the road about converting from cash to accrual or accrual
to cash.
Because you might have a company that has their financial statements based on one method
versus the other.
Now, what that means though, what we�re saying here is financial performance reflected
by accrual accounting, which provides a better basis for assessing the entity�s past and
future performance than does cash.
Because you can play with cash, right?
You give me a check today, but if I�m not going to deposit it today, then it may not
be a revenue based on cash, whereas if I�ve earned it, whether I deposit it or not, or
if I�ve earned it, whether you�ve received it or not, it�s still a revenue.
So that�s where the numbers on the income statement are going to be a little bit more
consistent under accrual accounting.
We�ve got financial performance reflected by past cash flows.
That�ll deal with a statement of cash flows, which has different sections in it called
operating activities, investing activities, financing activities, and we�ll define all
of what goes in to each category.
And then finally, changes in economic resources and claims that are not relating to the financial
performance.
So, there are changes in the resources, for example, if we issue common stock, we have
debit cash credit common stock, credit additional paid capital, so we have money coming in,
but it's not from the normal course of business, it�s from issuing things like stock.
So, when we look at this we're talking about what are the main objectives?
What do we want out of a good set of financial statements?
We want this to provide useful information to creditors, investors and lenders.
We want it to talk about the economic resources, the claims to those resources, and the custody
of the resources.
We want it to talk about the balance sheet, the income statement, cash flows.
We want it to be based on accrual accounting.
That's what we're talking about.
Those are the main things we want out of these financial statements.
Now, we can meet those objectives...