So this presentation is going to be an introduction to financial accounting, and
we'll begin by talking about accounting in the business environment. So we'll
start with some simple accounting terms that you need to know and build upon. So
the first thing we'll talk about is accounting. Accounting is the language of
business that measures business activities, processes data into reports
and communicates those results to decision-makers. Financial statements are
reports on a business in monetary terms. So these are probably all terms that
you're familiar with, but now you have a more solidified definition of what these
terms mean. There are four financial statements. The first statement that you
need to prepare is an income statement. The income statement will show us what
our revenues and our expenses are and then from those two numbers we'll be
able to calculate what's called net income. The second statement that we'll
be preparing will be the statement of retained earnings. This statement simply
shows us what the change in our retained earnings are for a period of time. So
from how did we go from our beginning retained earnings to our ending retained
earnings? The third financial statement is the
balance sheet. The balance sheet shows us our financial position as of as of a
specific day in time. And the fourth financial statement is the statement of
cash flows, and there are three sections of this statement that we need to be
familiar with and we'll be looking at those later. There are two types of
accounting. The first type is financial accounting.
In this area of accounting, we produce those financial statements or those
reports that provide information to users outside of the company to assist
them in decision making. For example, an investor needs to know your financial
information to be able to make an informed decision as to whether they
want to invest in your company or not. The second form of accounting is
managerial or management accounting. This type of accounting information provides
information to users inside the company to assist in decision making. So now
we'll talk about users of these specific types of accounting information. The
first one financial accounting information. Users of this type would be
creditors, people lending you money, or a company money. They would need to know
how financially secure are you for me to be able to lend you money? The second
would be investors, which we mentioned before. An investor would want to know
should I invest in this company? Am I going to get a good return? Are they
financially stable? A third user would be the government. For example the IRS. Users
of managerial or management accounting would be management. They would take this
managerial accounting information and make decisions for the future of the
business. Where do we go from here? So just to give us a diagram of what we've
just talked about in making decisions.
Insiders, users of managerial accounting, make
decisions for a company. Where are we going to go from here? Outsiders, that use
financial accounting information, will make decisions about a company. So what
should I do in regards to this particular
company? A few more concepts and principles that we need to be have a
firm foundation with is GAAP. GAAP stands for generally accepted accounting
principles and GAAP tells us that information must be three things. Useful
information must be relevant, it must be reliable, and it must be comparable. So
the information that we're given as investors for example the information
needs to be relevant. Is it relevant for me to be able to make a decision? Is it
reliable information? And again we'll be talking about these in more detail, but
reliable. How reliable is the information? Do you have a document stating this is
what you paid for this item or is it just a number you made up? And is your
information comparable? So we're given these methods of for example inventory
valuation methods that were allowed to use that way an investor can look at two
companies that are keeping their financial records and say okay I know
they're following a certain set of rules, therefore, these companies are comparable.
I can compare them. Without a set of rules, then there's nothing to compare a
company with it's apples and oranges as opposed to apples and apples. So let's
look at some examples of these concepts and principles.
So Jane's personal assets are not recorded on the company's balance sheet.
This is an example of the entity concept. This means that a company is separate
from its owner. So Jane is the owner of this company and her personal assets are
not recorded on the books of the company because they are separate entities. Greg
records furniture at its cost of $12,000 not its market value of
$16,000. This is an example of cost
principal, which states we record assets at what we pay for them. Its' historical
cost. That is reliable information. Jerry does not make adjustments for inflation.
This is called a stable monetary unit as accountants for conservative people and
we do not make adjustments for inflation because we believe over time that the
dollar will remain stable. An account payable of $5,000 is
documented by a statement from the furniture company showing the business
still owes $5,000 on the furniture. Your friend thinks you should
only owe about $4,000 at this point. The account payable is
recorded at $5000. That's the reliable amount. This is because of
the reliability principle, so you'll note that the cost principle and the
reliability principle are very closely related here.