ACCOUNTING ASWSUMMER 2005

Mark Lang

OVERVIEW

• Overview of ASW

- work through syllabus

• Overview of accounting

- goals

- structure

- major financial statements

Basics

• What is a company?

• Why do companies exist?

• How large should a company be?

Role of Accounting

• The communication problem

- How to condense millions of transactions in a meaningful way

• With whom does it communicate?

- Investors--debt and equity

- Employees--CEO, store manager, inventory managers, other employees

- Taxing authorities--state and local

- Others (government, labor, etc.)

Financial Accounting

• Why do investors need information?

- What to invest in

- Performance of management

• separation of ownership and control

• What kind of information do they need?

- To forecast:

• the amount

• timing

• uncertainty of future cash flows

Investor Communication

• Problem:

- atomistic investors

- diversified investors

• Answer

- generally accepted accounting principles (GAAP)

US GAAP

• Congress

• Securities and Exchange Commission

• Financial Accounting Standards Board

- American Institute of CPAs

- Emerging Issues Task Force, etc.

• IASB may change all that

Basic Statements

• Balance Sheet– net worth

• Income Statement– change in net worth through firm activities

• Statement of Cash Flows– change in cash

• Notes to the Statements• Audit Opinion

Balance Sheet

• Snap shot of the firm at period-end

• Most basic financial statement

- All others derive from it

- Assets

- Liabilities

- Owners’ Equity

Assets = Liabilities + Owners’ Equity

• Assets--provide future benefits to the firm

- cash or expected to provide cash in future

• current--cash, sold or consumed within year

• noncurrent--held for longer periods

• Liabilities--creditor claims

- expected to require future cash outflows

• current--due within a year

• noncurrent--due later• Owners’ Equity-- the residual

- contributed capital

- retained earnings • RE05 = RE04 + NI05 - Dividends05 - Other05

• Other often includes share repurchases

• I’ll put repurchases and other in dividends for now

• Problem 1.22

Income Statement

• Derives from the balance sheet

- change in net assets due to operations

- assets = liabilities + retained earnings + contributed capital

- RE05 = RE04 + NI05 - Dividends05

Net income = Revenue - Expense

• Revenues

- Sales

- Other• Expenses

- Cost of Goods sold: WM—76% of revenues

- Selling, Gen. & Admin: WM—18% of rev.

- Other: WM—0% of rev.

- Income Tax Expense: WM—2% of rev.• Problem 1.19

Statement of Cash Flows

• Derives from the balance sheet

- Explains change in cash = Cash05 – Cash04

- Generally begins with net income

- Sections

• Operating

• Investing

• Financing

• Problem 1-29, 1-34

Other Disclosures

• Notes to the financial statements– accounting policies and details on accounts

• Audit report

• Management’s discussion and analysis

• Segment reporting– geographic and industry segments

• Quarterly results

• Five-year summary