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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 account
2、ing 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 Decision m
3、akers1.2 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 Accounting-
4、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 used to
5、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 determine th
6、e 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 Standards Board(
7、FASB)issues Statements of Financial Accounting Concepts.lThese statements constitute the conceptual framework of accounting.1.3 THE FASBS FINANCIAL ACCOUNTING CONCEPTUAL FRAMEWORK1.3-1 1.3-1 Objectives of the Conceptual FrameworkObjectives of the Conceptual FrameworkThe Framework is to be the founda
8、tion for building a set of coherent accounting standards and rules.The Framework is to be a reference of basic accounting theory 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
9、of objectives.The second level explains financial elements and characteristics of information.The third level incorporates recognition and measurement criteria.Level I.Basic Objectives of FinancialReportinglTo provide information:labout economic resources,the claims on those resources and changes in
10、 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 who reasonably understand business and economic activities.Level II.Basic Elements And Qualitative Level II.Basic Elements And Quali
11、tative Characteristics of Accounting informationCharacteristics of Accounting informationlLiabilities:Probable future sacrifices of economic benefitslEquity:Residual or ownership interestlInvestment by Owners:Increases in net assetslDistributions to Owners:Decreases in net assetslComprehensive Incom
12、e:Changes in equity from 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)Elem
13、ents in Financial StatementsElements in financial statements1.Revenues2.Expenses income statement3.Gains4.Losses5.Comprehensive income6.Assets7.Liabilities balance sheet8.Owners equity9.Investment by the owners10.Distributions to ownersREVENUESREVENUESlRevenues are the gross increases in owners(stoc
14、kholders)equity that result 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.EXPENSESEXPENSESlExpenses are the decreases in owners(stockho
15、lders)equity that result from 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 e
16、xceed revenues,a net 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 lossesLosses:decrease in equity from incidental or periphera
17、l transactions not associated with the companys major or central lines of business,e.g.loss from disposal of fixed asset.ASSETSASSETSlAssets are resources owned by a business.lThey are things of value used in carrying out such activities as production,consumption and exchange.lThe common characteris
18、tics possessed by all assets is the capacity to provide future services or benefits to the entities that use them.LIABILITIESLIABILITIESlLiabilities are claims against assets.lThey are existing debts and obligations.lMost claims of creditors attach to total enterprise assets rather than to the speci
19、fic assets provided by the creditor.Owners equityClaim on net assetsOwners 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 OwnersReve
20、nuesOwners EquityDrawingExpensesINCREASES AND DECREASES ININCREASES AND DECREASES INOWNERS EQUITYOWNERS EQUITYINCREASEDECREASEInvestments by StockholdersRevenuesStockholders EquityDividends toStockholdersExpensesINCREASES AND DECREASES ININCREASES AND DECREASES INSTOCKHOLDERS EQUITYSTOCKHOLDERS EQUI
21、TYINCREASEDECREASE(ii).Qualitative Characteristics of Accounting Informationl1.Primary qualities are Relevance and Reliability of accounting information.l lRelevance of informationRelevance of information means“information c capable of making a difference in a decision context.”lThe information must
22、 be timely to be relevant.lThe information should have predictive value:(be helpful in making predictions about ultimate outcomes of past,present and future events).lThe information should have feedback value(helps users to confirm prior expectations.)lInformation is reliable,when it can be relied o
23、n to represent the true,underlying situation.lTo be reliable,information must be:1*verifiable2 *faithful,and3*neutrall2.Secondary characteristics are:comparability and consistency of reported information.lFor information to be comparable,it must be:omparable,it must be:1)measured and reported in a s
24、imilar 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 enterprises.lAccounting information is consistent,if the same accounting principles are applied in a similar manner from one peri
25、od 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 the change,must be disclosed.lLevel III.Recognition and Measurement Criterial(I).Environmental Assumptions 1.Economic Entity As
26、sumption 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 enterprise may be organized as solo proprietorship,partnership and corporation.Solo-proprietorshiplA business owned by one person.lThe owner
27、 is often the manager/operator of the business.lSmall service-type businesses or small retail stores.Solo-proprietorshiplUsually only a limited amount of money(capital)is necessary to start in business,and the owner receives any profits,suffers any losses,and is personally liable for all debts of th
28、e business.PartnershiplWhen a business is owned by two or more persons(partners).lWhen a partnership is created,there should be an agreement setting forth 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 wit
29、hdrawal of a partner.PartnershiplEach partner generally has unlimited personal liability for the debts of the partnership.lThe partnership affairs must be kept separate from the personal activities of the partners.CorporationlA business organized as a separate legal entity under state corporation la
30、w and its ownership divided into transferable shares of stock is called a corporation.lThe holders of the shares enjoy limited liability;they are not personally liable for the debts of the corporate entity.2.Going Concern AssumptionlThe business is assumed to continue indefinitely unless terminated
31、by owners.lThe basis of recording financial elements is historical accounting.lLiquidation accounting(based on liquidation values)is not followed 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,
32、and simple to understand.4.Time Period Assumption(to be explained in Chapter 2)2222(iii).Implementation Principles1.Cost Principle(Historical Cost Principle)lTransaction is recorded at its acquisition price.lIt is not changed to reflect market price.lThe principle applies to assets and liabilities.l
33、Users 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 or market values applied to inventory valuation(to be explained in Chapter 7).2.Revenue Recognition PrinciplelRevenue is recognize
34、d when it is earned or realizable,the sellers major task has completed and the amount can be objectively determined.24243.The Matching PrincipleExpenses in one period are matched to revenues of the same period so as to determine the profit in the cureent period appropriately.4.The Full Disclosure Pr
35、incipleFinancial 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 financial statements,as notes to those statements,or as supplementary information.Implementation Constraints 1.Cost-Benefit Relationship *The
36、 cost of providing information should not outweigh the benefit derived.*Costs and benefits are not always obvious or quantifiable.*Sound judgment must be used in providing information.2.Materiality refers to an items importance to a firms overall financial operations.3.Industry PracticeslThe nature
37、of some industries may sometimes require departures from basic accounting theory.lIf application of accounting theory results in statements that are not comparable or consistent,then industry practices must examined for possible explanations.4.Conservatism suggests that the preparer,when in doubt,ch
38、oose a conservative solution.This solution will be least likely to overstate assets and income.Conservatism does not suggest that net assets or net income be deliberately understated.1.4 The Accounting Equation And Transactions1.4 The Accounting Equation And TransactionsThe Accounting Equation:Asset
39、s=Liabilities+Owners EquityAssets=Liabilities+Owners EquitylTransactions 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 econ
40、omic events that occur entirely within one company.TRANSACTION ANALYSISTRANSACTION ANALYSISlRex Nelson decided to open a computer programming company which named as Softroom.lHe invested$150,000 cash in the business.TRANSACTION ANALYSIS TRANSACTION ANALYSIS TRANSACTION TRANSACTION 1 1There is an inc
41、rease in the asset Cash,$15,000,and an equal increase in the stockholders equity,R.N.Capital,$150,000.TRANSACTION ANALYSIS TRANSACTION ANALYSIS TRANSACTION TRANSACTION 1 1 SOLUTION SOLUTION(1)+150,000 =+150,000 CapitalAssets=Liabilities+Owners EquityR.NelsonCashCapitalTRANSACTION ANALYSIS TRANSACTIO
42、N ANALYSIS TRANSACTION TRANSACTION 2 2Softroom purchased computer equipment for$70,000 cash.Cash is decreased$70,000 and the asset Equipment is increased$70,000.TRANSACTION ANALYSIS TRANSACTION ANALYSIS TRANSACTION TRANSACTION 2 2 SOLUTION SOLUTION=+70,000=(2)-70,000 +70,000 Assets=Liabilities+R.N.C
43、apitalCash+EquipmentOld Bal.150,000 150,000New Bal.80,000 150,000Owners EquitylSoftroom purchased computer paper and other supplies expected to last several months from Adam Supply Company for$16,000 on credit.TRANSACTION ANALYSIS TRANSACTION ANALYSIS TRANSACTION TRANSACTION 3 3Adam Supply CompanySo
44、ftroom,Inc.The asset Supplies is increased$16,000 and the liability Accounts Payable is increased by the same amount.TRANSACTION ANALYSIS TRANSACTION ANALYSIS TRANSACTION TRANSACTION 3 3 SOLUTION SOLUTION+=+(3)+16,000 +16,000 Assets=Liabilities+Owners EquityAccountsR.N.CapitalCash+Supplies+Equipment
45、=Payable+Old Bal.80,00070,000150,000New Bal.80,000 16,000+70,000 16,000150,000lSoftroom received$12,000 cash from customers for programming services it has provided.TRANSACTION ANALYSIS TRANSACTION ANALYSIS TRANSACTIONTRANSACTION 4 4SoftroomCash is increased$12,000 and R.N.Capital is increased$12,00
46、0.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 ANALYSIS TRANSACTION TRANSACTION 4 4 SOLUTION SOLUTION(4)+12,000 +12,000 Service Revenue Softr
47、oom 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 ANALYSIS TRANSACTIONTRANSACTION 5 5Accounts Payable is increased$2,500,and R.N.Capital is decreased
48、$2,500.TRANSACTION ANALYSIS TRANSACTION ANALYSIS TRANSACTION TRANSACTION 5 5 SOLUTION 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
49、Softroom provided programming services of$35,000 for customers.lCash amounting to$15,000 was received from customers,and the balance of$20,000 was billed to customers on account.SoftroomBillTRANSACTION ANALYSIS TRANSACTION ANALYSIS TRANSACTIONTRANSACTION 6 6TRANSACTION ANALYSIS TRANSACTION 6 SOLUTIO
50、N Assets =Liabilities +Owners Equity Cash +A/R +Supplies +Equipment =Accounts Payable +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 f