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1、西西 方方 财财 务务 会会 计计WESTERN FINANCIAL ACCOUNTINGChapter 1The Financial Accounting Conceptual Framework And The Accounting Equation1.1 ACCOUNTINGlA service activity - Provide useful information about economic entities to interested partieslAnd a measurement-communication activity- The usefulness of acco
2、unting information depends on effective measurement of the economic activities and effective communication of those measurements to users of that information.Accounting information and decision makersAccountinginformationFinancial accounting ManagementAccountingExternalDecisionmakersInternal Decisio
3、n makers1.2 COMPARISON BETWEEN FINANCIAL AND MANAGEMENT ACCOUNTINGlManagement Accounting - The process of developing and reporting accounting information for internal users who have direct access to the information preparing.1.2 COMPARISON BETWEEN FINANCIAL AND MANAGEMENT ACCOUNTINGlFinancial Accoun
4、ting - The process of developing and reporting financial information for external users who do not have direct access to the information preparing which should be in accordance with General Accepted Accounting Principles (GAAP). GAAPlGenerally accepted accounting principles are the measurement rules
5、 used to develop the information in financial statement.lThey are those guidelines which indicate how to report economic events.lThey consist of a number of concepts,principles and procedures.Generally Accepted Accounting PrincipleslThe Securities and Exchange Commission (SEC) has the authority to d
6、etermine the financial statements to be provided to stockholders and the measurement rules applied in producing the statements.lThe Financial Accounting Standards Board (FASB) is currently recognized as the group responsible for establishing GAAP.The Conceptual FrameworklThe Financial Accounting Sta
7、ndards Board (FASB) issues Statements of Financial Accounting Concepts.lThese statements constitute the conceptual framework of accounting.The Framework is to be the foundation for building a set of coherent accounting standards and rules. The Framework is to be a reference of basic accounting theor
8、y for solving emerging practical problems of reporting.1.3-2 Overview of the Conceptual Framework - Three levels of objectives elements and principlesThe first level consists of objectives.The second level explains financial elements and characteristics of information.The third level incorporates re
9、cognition and measurement criteria.lTo provide information:labout economic resources, the claims on those resources and changes in them lthat is useful to those making investment and credit decisions, such as present and future investors, creditors in assessing future cash flows;lAnd to individuals
10、who reasonably understand business and economic activities.lLiabilities: Probable future sacrifices of economic benefitslEquity: Residual or ownership interestlInvestment by Owners: Increases in net assetslDistributions to Owners: Decreases in net assetslComprehensive Income: Changes in equity from
11、non-owner sourceslRevenues: Inflows from entitys ongoing operationslExpenses: Outflows from entitys ongoing operationslGains: Increases in equity from incidental transactionslLosses: Decreases in equity from incidental transactionslAssets: Probable future economic benefits(i) Elements in Financial S
12、tatementsElements in financial statements1.Revenues2.Expenses income statement3.Gains4.Losses5.Comprehensive income6.Assets7.Liabilities balance sheet8.Owners equity9.Investment by the owners10. Distributions to ownersREVENUESlRevenues are the gross increases in owners (stockholders) equity that res
13、ult from operating the business.lGenerally, revenues result from the sale of merchandise, the performance of services, the rental of property, or the lending of money.lRevenues usually result in an increase in an asset.EXPENSESlExpenses are the decreases in owners (stockholders) equity that result f
14、rom operating the business.lThey are the cost of assets consumed or services used in the process of earning revenue.lExamples of expenses include utility expense, rent expense, supplies expense, and tax expense.lWhen revenues exceed expenses, net income results.lWhen expenses exceed revenues, a net
15、loss results.Gains and losses(con.) Gains: increase in equity from incidental or peripheral transactions not associated with the companys major or central lines of business, e.g. gain from disposal of fixed asset.Gains and losses Losses: decrease in equity from incidental or peripheral transactions
16、not associated with the companys major or central lines of business,e.g. loss from disposal of fixed asset.ASSETSl Assets are resources owned by a business.l They are things of value used in carrying out such activities as production, consumption and exchange.l The common characteristics possessed b
17、y all assets is the capacity to provide future services or benefits to the entities that use them.LIABILITIESlLiabilities are claims against assets.lThey are existing debts and obligations.lMost claims of creditors attach to total enterprise assets rather than to the specific assets provided by the
18、creditor.Owners equity Claim on net assets Owners equity = total assets - total liabilities Different OE Proprietorship and partnership: Capital (subdivisions: Capital; Drawing) Corporation: Stockholders equity (subdivisions: Paid-in capital; Retained earnings)Investments by OwnersRevenuesOwners Equ
19、ityDrawingExpensesINCREASES AND DECREASES INOWNERS EQUITYINCREASEDECREASEInvestments by StockholdersRevenuesStockholders EquityDividends toStockholdersExpensesINCREASES AND DECREASES INSTOCKHOLDERS EQUITYINCREASEDECREASE(ii). Qualitative Characteristics of Accounting Informationl1. Primary qualities
20、 are Relevance and Reliability of accounting information. means “information apable of making a difference in a decision context.”lThe information must be timely to be relevant.lThe information should have predictive value: (be helpful in making predictions about ultimate outcomes of past, present a
21、nd future events).lThe information should have feedback value (helps users to confirm prior expectations.)lInformation is reliable, when it can be relied on to represent the true, underlying situation.lTo be reliable, information must be:1* verifiable2 * faithful, and3* neutrall2. Secondary characte
22、ristics are: comparability and consistency of reported information.lFor information to be c1) measured and reported in a similar manner for different enterprises.2) useful in the allocation of resources to the areas of greatest benefit.3) useful to users in identifying real differences between enter
23、prises.lAccounting information is consistent, if the same accounting principles are applied in a similar manner from one period to the next.lAccounting principles may be changed, if the change results in better reporting.lIf principles are changed, the justification for, and the nature and effect of
24、 the change, must be disclosed.lLevel III. Recognition and Measurement Criterial(I).Environmental Assumptions 1. Economic Entity Assumption An economic entity can be any organization or unit in society. The business is distinct from :(1) its owners and (2) all other economic entities. A business ent
25、erprise may be organized as solo proprietorship, partnership and corporation.Solo-proprietorshiplA business owned by one person.lThe owner is often the manager/operator of the business.lSmall service-type businesses or small retail stores.Solo-proprietorshiplUsually only a limited amount of money (c
26、apital) is necessary to start in business, and the owner receives any profits, suffers any losses, and is personally liable for all debts of the business.PartnershiplWhen a business is owned by two or more persons (partners) .lWhen a partnership is created, there should be an agreement setting forth
27、 such terms as initial investment of each partner, duties of each partner, division of profits or losses, and settlement to be made upon death or withdrawal of a partner. PartnershiplEach partner generally has unlimited personal liability for the debts of the partnership.lThe partnership affairs mus
28、t be kept separate from the personal activities of the partners.CorporationlA business organized as a separate legal entity under state corporation law and its ownership divided into transferable shares of stock is called a corporation.lThe holders of the shares enjoy limited liability; they are not
29、 personally liable for the debts of the corporate entity.2. Going Concern AssumptionlThe business is assumed to continue indefinitely unless terminated by owners.lThe basis of recording financial elements is historical accounting.lLiquidation accounting (based on liquidation values) is not followed
30、unless so indicated.3.Monetary Unit (Unit Of Measurement)lMoney is the common unit of measure of economic transactions.lUse of a monetary unit is relevant, and simple to understand.4.Time Period Assumption(to be explained in Chapter 2)22221.Cost Principle (Historical Cost Principle)lTransaction is r
31、ecorded at its acquisition price.lIt is not changed to reflect market price. lThe principle applies to assets and liabilities.lUsers of financial statements may find current fair value information to be useful as well.lA “mixed attribute” system reports historical cost, fair value, and lower of cost
32、 or market values applied to inventory valuation (to be explained in Chapter 7).2. Revenue Recognition PrinciplelRevenue is recognized when it is earned or realizable, the sellers major task has completed and the amount can be objectively determined.24243. The Matching Principle Expenses in one peri
33、od are matched to revenues of the same period so as to determine the profit in the cureent period appropriately. 4. The Full Disclosure PrincipleFinancial statements must report what a reasonable person would need to know to make an informed decision.Disclosure may be made: within the body of the fi
34、nancial statements, as notes to those statements, or as supplementary information. Implementation Constraints 1. Cost-Benefit Relationship * The cost of providing information should not outweigh the benefit derived. * Costs and benefits are not always obvious or quantifiable. * Sound judgment must b
35、e used in providing information.2. Materiality refers to an items importance to a firms overall financial operations.3. Industry PracticeslThe nature of some industries may sometimes require departures from basic accounting theory.lIf application of accounting theory results in statements that are n
36、ot comparable or consistent, then industry practices must examined for possible explanations. 4. Conservatism suggests that the preparer, when in doubt, choose a conservative solution.This solution will be least likely to overstate assets and income.Conservatism does not suggest that net assets or n
37、et income be deliberately understated.The Accounting Equation:lTransactions are the economic events of the enterprise.lThey may be identified as external or internal.1 External transactions involve economic events between the company and some outside enterprise or party.2 Internal transactions are e
38、conomic events that occur entirely within one company.TRANSACTION ANALYSISlRex Nelson decided to open a computer programming company which named as Softroom.lHe invested $150,000 cash in the business.TRANSACTION ANALYSIS TRANSACTION 1There is an increase in the asset Cash, $15,000, and an equal incr
39、ease in the stockholders equity, R. N. Capital, $150,000.TRANSACTION ANALYSIS TRANSACTION 1 SOLUTION(1) +150,000 = + 150,000 CapitalAssets=Liabilities+Owners EquityR. NelsonCashCapitalTRANSACTION ANALYSIS TRANSACTION 2Softroom purchased computer equipment for $70,000 cash.Cash is decreased $70,000 a
40、nd the asset Equipment is increased $70,000.TRANSACTION ANALYSIS TRANSACTION 2 SOLUTION=+ 70,000=(2) -70,000 + 70,000 Assets=Liabilities+R. N. CapitalCash+EquipmentOld Bal. 150,000 150,000New Bal. 80,000 150,000Owners Equityl Softroom purchased computer paper and other supplies expected to last seve
41、ral months from Adam Supply Company for $16,000 on credit.TRANSACTION ANALYSIS TRANSACTION 3Adam Supply CompanySoftroom, Inc.The asset Supplies is increased $16,000 and the liability Accounts Payable is increased by the same amount.TRANSACTION ANALYSIS TRANSACTION 3 SOLUTION+=+(3) + 16,000 + 16,000
42、Assets=Liabilities+Owners EquityAccountsR.N. CapitalCash+Supplies+Equipment=Payable+Old Bal.80,00070,000150,000New Bal.80,000 16,000+70,000 16,000150,000l Softroom received $12,000 cash from customers for programming services it has provided.TRANSACTION ANALYSIS TRANSACTION 4SoftroomCash is increase
43、d $12,000 and R. N. Capital is increased $12,000.Assets=Liabilities+Stockholders EquityAccountsCash+Supplies+Equipment=Payable+Old Bal. 80,00016,00070,00016,000150,000New Bal. 92,000 +16,000+70,000=16,000+162,000R.N. CapitalTRANSACTION ANALYSIS TRANSACTION 4 SOLUTION(4) +12,000 +12,000 Service Reven
44、ue Softroom received a bill for $2,500 from the Daily News for advertising the opening of its business but postponed payment of the bill until a later date.SoftroomDailyNewsBillTRANSACTION ANALYSIS TRANSACTION 5Accounts Payable is increased $2,500, and R. N. Capital is decreased $2,500.TRANSACTION A
45、NALYSIS TRANSACTION 5 SOLUTIONAssets=Liabilities+AccountsCash+Supplies+Equipment=Payable+Old Bal.92,00016,0070,000 16,000162,000New Bal.92,000+16,000+70,000=18,500+ 159,500Stockholders EquityR.N. Capital + 2,500 -2,500 Advertising Expensel Softroom provided programming services of $35,000 for custom
46、ers.l Cash amounting to $15,000 was received from customers, and the balance of $20,000 was billed to customers on account.SoftroomBillTRANSACTION ANALYSIS TRANSACTION 6TRANSACTION ANALYSIS TRANSACTION 6 SOLUTION Assets = Liabilities + Owners Equity Cash + A/R + Supplies + Equipment = Accounts Payab
47、le + R.N Capital Old bal. 92,000 16,000 70,000 18,500 159,500+15000 +20000 +35,000 Service RevenueCash was increased $15 000;Accounts Receivable was increased $20 000;and Capital was increased $35000Expenses paid in cash for September were store rent, $6,000, salaries of employees, $9,000, and utili
48、ties, $2,000.Softroom, Inc.$6,000$9,000$2,000TRANSACTION ANALYSIS TRANSACTION 7Rent Exp.Salaries Exp.Utilities Exp.A count of supplies on September 30 indicated that $4,000 of supplies had been used in developing software for clients.TRANSACTION ANALYSIS TRANSACTION 8 Assets = Liabilities + Owners E
49、quity Cash + A/R + Supplies + Equipment = Accounts Payable + R.N Capital -4,000 -4,000 Supplies ExpenseSoftroom paid its Daily News advertising bill of $2,500 in cash. It had previously been recorded in transaction 5 as an increase in Accounts Payable.Softroom, Inc.DailyNewsTRANSACTION ANALYSIS TRAN
50、SACTION 9 Assets = Liabilities + Owners Equity Cash + A/R + Supplies + Equipment = Accounts Payable + R.N Capital -2500 -2500The sum of $6,000 in cash was received from customers who had previously been billed for services in Transaction 6.TRANSACTION ANALYSIS TRANSACTION 10Softroom, Inc. Assets = L