Financial Accounting

• BY 周卉 Vivian• Tel:6126604 13286006815 • Office: Rm C401 in the Library• Office hour: Friday morning 9:00-12:00• Email: zhouhuivivian@hotmail.com

Chapter 7 ACCOUNTING PRINCIPLES会计原则

MAIN POINTS• Generally accepted accounting principles and

conceptual framework• Objectives of financial reporting• Qualitative characteristics of accounting information

and elements of financial statements• Assumptions used by accountants• Principles of accounting• Constraints in accounting• Understand and analyze classified financial statements

THE CONCEPTUAL FRAMEWORK OF ACCOUNTING 会计概念框架

Generally accepted accounting principles一般公认的会计原则 are a set of rules and practices that are recognized as a general guide for financial reporting purposes.

Generally accepted means that these principles must have substantial authoritative support( 权威支持 ).

THE CONCEPTUAL FRAMEWORK OF ACCOUNTING 会计概念框架

This support usually comes from the Financial Accounting Standards Board (FASB 美国财务会计准则委员 ) and Securities and Exchange Commission (SEC 美国证监会 ).

The FASB has the responsibility for developing accounting principles in the United States.

Public Sector(SEC)

Private Sector(FASB)

Private Sector(AICPA) (IMA)

GAAP

THE CONCEPTUAL FRAMEWORK OF ACCOUNTING

• The conceptual framework( 概念框架 ) developed by the FASB serves as the basis for resolving accounting and reporting problems.

• All rules and practices are developed based on the conceptual framework.

The conceptual framework consists of:- objectives of financial reporting 财务报告的目标 ;- qualitative characteristics of accounting information 会计信息的质量特征 ;- elements of financial statements 财务报表的成分 ; and- Operating guidelines 运用指南 (assumptions假设 , principles 原则 , and constraints 限制 ).

THE CONCEPTUAL FRAMEWORK OF ACCOUNTING

OBJECTIVES OF FINANCIAL REPORTING

• The FASB concluded that the objectives of financial reporting are to provide information that:

1.Is useful to those making investment and credit decisions 对投资信贷决策有帮助

2.Is helpful in assessing future cash flows 对预测未来现金流量有帮助 .3.Identifies the economic resources (assets), the

claims to those resources (liabilities), and the changes in those resources and claims. 确认资产 , 负债及其变化

The FASB concluded that the overriding criterion by which accounting choices should be judged is decision usefulness 决策有用性 .

To be useful, information should possess the following qualitative characteristics:1 relevance 相关 ,2 reliability 可靠 , and3 comparability 可比性 and consistency 一致性 .

QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION

Accounting information is relevant if it makes a difference in a decision.

Predictive value and feedback value. Information must be available to decision

makers before it loses its capacity to influence their decisions (timely 及时性 ).

RELEVANCE 相关性

RELIABILITY 可靠性 Reliability of information means that the

information is free of error and bias( 没有错误和偏差 ); it can be depended on. To be reliable, accounting information must

be verifiable 可验证的 – we must be able to prove that it is free of error and bias.

The information must be a faithful representation 公正地表示 of what it purports to be – it must be factual.

COMPARABILITY AND CONSISTENCY可比性和一致性 Comparability means that the information

should be comparable with accounting information about other enterprises.

Consistency means that the same accounting principles and methods should be used from year to year within a company.

1999 2000 2001

Operating guidelines are classified as assumptions, principles, and constraints.

Assumptions 假设 provide a foundation for the accounting process.

THE OPERATING GUIDELINES OF ACCOUNTING 会计应用指南

1 The monetary unit assumption 货币单位假设 states that only transaction data capable of being expressed in terms of money should be included in the accounting records of the economic entity.

• This also implies the dollar’s purchasing power is relativelystable.• Example: employee satisfaction and percent

of international employees are not transactions that should be included in the financial records.

ASSUMPTIONS 假设

2 The economic entity assumption 会计主体假设 states that economic events can be identified with a particular unit of accountability.Example: BMW activities can be distinguished from those of other car manufacturers such as Honda.

ASSUMPTIONS

3 The time period assumption 会计期间假设 states that the economic life of a business can be divided into artificial time periods.Example: months, quarters, and years

ASSUMPTIONS

4 The going concern assumption 持续经营假设 assumes that the enterprise will continue in operation long enough to carry out its existing objectives.Implications:

depreciation 折旧 is used, plant assets recorded at cost instead of

liquidation value( 清算价值 ), items are labeled as fixed or long-term.

ASSUMPTIONS

Principles 原则 are specific rules that indicate how transactions and other economic events should be recorded in the accounting process.

The revenue recognition principle 收入确认原则 dictates that revenue should be recognized in the accounting period in which it is earned.

When a sale is involved, revenue is recognized at the point of sale.

While for service companies, revenue is recognized when service is performed.

PRINCIPLES

Expense recognition is traditionally tied to revenue recognition.

This practice – referred to as the matching principle – dictates that expenses be matched with revenues in the period in which efforts are expended to generate revenues.

MATCHING (EXPENSE RECOGNITION)配比原则 ( 费用确认原则 )

To understand the various approaches for matching expenses and revenues on the income statement, it is necessary to examine the nature of expenses.1 Expired costs( 已耗成本 ) are costs that will generate revenues only in the current period and are therefore reported as operating expenses 经营费用 on the income statement.These expenses will then be closed in the current period.2 Unexpired costs ( 未耗成本 ) are costs that will generate revenues in future accounting periods and are first recognized as assets.

MATCHING (EXPENSE RECOGNITION)配比原则 ( 费用确认原则 )

MATCHING (EXPENSE RECOGNITION)

• Unexpired costs become expenses in 2 ways:- Cost of goods sold – Costs carried as merchandise

inventory are expensed as cost of goods sold in the period in which the sale occurs – so there is a direct matching of expenses with revenues.

- Operating expenses – Unexpired costs become operating expenses through use or consumption or through the passage of time

FULL DISCLOSURE 充分批露原则The full disclosure principle requires that

circumstances and events that make a difference to financial statement users be disclosed.

FULL DISCLOSURE 充分批露原则• Compliance with the full disclosure principle

is accomplished through- the data in the financial statements and - the notes ( 注解 ) that accompany the

statements E.G. A summary of significant accounting

policies is usually the first note to the financial statements

COST PRINCIPLES 成本原则• The cost principle dictates that assets are

recorded at their actual cost/historical cost.• This principle also holds that accounting

records should maintain the historical cost of an asset over its useful life.

• Exception: plant asset revaluation, Lower of cost or market

• Cost is used because it is both relevant and reliable.

COST PRINCIPLES 成本原则• Cost is relevant because if represents - a) the price paid, - b) the assets sacrificed, or - c) the commitment made at the date of

acquisition.

COST PRINCIPLES 成本原则• Cost is reliable because it is - a) objectively measurable( 客观性计量 ), - b) factual, and - c) verifiable.

CONSTRAINTS IN ACCOUNTING

• Companies are subject to some Constraints 限制 to modify( 修改 ) generally accepted accounting principles without reducing the usefulness of the reported information.

CONSTRAINTS IN ACCOUNTING

• Constraints 限制 permit a company to modify generally accepted accounting principles.

• The pre-condition is to meet the requirement of qualitative characr of accounting information-usefulness.

• The constraints are materiality and conservatism

CONSTRAINTS IN ACCOUNTING

• Materiality 重要性 relates to an item’s impact on a firm’s overall financial condition and operations

• Conservatism 稳健性 in accounting means that, when in doubt, the accountant chooses the method that will be the least likely to overstate assets and income.

CONCEPTUAL FRAMEWORK

CONSTRAINTS

CONSTRAINTS

Objectives of Financial Reporting

Assumptions Principles

Operating Guidelines

Qualitative Characteristics of

Accounting Information

Elements of Financial Statements

Assets Liabilities and Owner’s Equity

The balance sheet is composed of 3 major elements: assets, liabilities, and stockholders’ equityA classified balance sheet generally has the following standard classifications:

Current Assets Current LiabilitiesLong-Term Investments Long-Term LiabilitiesProperty, Plant and Owner’s (Stockholders’) Equity EquipmentIntangible Assets

STANDARD BALANCE SHEET CLASSIFICATIONS

标准资产表分类

PROPRIETORSHIP 独资企业 BALANCE SHEET

The term “stockholder’s equity” is only used for corporations.

If the form of organization is a proprietorship, the term owner’s equity is used instead of stockholders’ equity to describe that section of the balance sheet.

An capital account is used to reflect the information of investment and net income (loss).

PROPRIETORSHIP 独资企业 BALANCE SHEET

Assume that Sally Field invests $90,000 on July 10 to start up Med/Waste Company.

The company’s balance sheet immediately after the investment is shown below.

Med/West Company

Balance Sheet

July 10, 2002

Cash 90,000 capital 90,000

PARTNERSHIP ( 合资 )BALANCE SHEET

If the form of organization is a partnership, each partner has a separate capital account and the owner’s equity section shows the capital accounts of all partners.

Assume that A. Roy and B. Siegfried form a partnership on December 11, 2002 by each investing $60,000.

The company’s balance sheet immediately after their investments is shown below.

Roy and Siegfried

Balance Sheet

December 11, 2002

Cash $ 120,000 Roy, capital

$60,000

Siegfried ,capital

60,000

FINANCIAL STATEMENT PRESENTATION AND ANALYSIS

The multiple-step income statement 多步式利润表 for Sellers Electronix, Inc. in Chapter 5 included the following:1 Sales revenue section – Presents the sales, discounts, allowances, and other related information to arrive at the net amount of sales revenue.2 Cost of goods sold ( 主营业务成本 , 销货成本 )– Indicates the cost of goods sold to produce sales.

FINANCIAL STATEMENT PRESENTATION AND ANALYSIS

3 Operating expenses 经营费用– Provides information on both selling and administrative expenses.4 Other revenues and gains 其它收益– Indicates revenues earned or gains resulting from non-operating transactions.5 Other expenses and losses 其它费用 – Indicates expenses or losses incurred from non-operating transactions.

Income taxes must be paid and reported for a corporation since a corporation is a legal entity that is separate and distinct from its owners.

Corporate income taxes (or income tax expense) are reported in a separate section of the income statement before net income.

INCOME TAX EXPENSE 所得税费

INCOME STATEMENT WITH INCOME TAXES

Leading Inc. Income Statement For the year ended December 31, 2002Sales $800,000Less: cost of goods sold 600,000Gross Profit 200,000Less: Operating expenses 50,000Income from operations $150,000Add: Other revenues and gains 10,000Less: other expenses and losses 4,000Income before income taxes 156,000Less: income tax expense 46,800Net Income $ 109,200

RECORDING INCOME TAXES

Income tax expense and the related liability for income taxes payable are recorded as part of the adjusting process preceding financial statement preparation. Using the previous data for Leads Inc., the adjusting entry for income tax expense at December 31, 2002, would be as follows:

RECORDING INCOME TAXES

Date Account titles DR CRDec.31

Income tax expense income taxes payable

46,80046,800

EARNINGS PER SHARE FORMULA

Earnings per share (EPS 每股盈利 ) indicates the net income earned by each share of common stock.

Thus, earnings per share is only reported for common stock.

The formula for computing earnings per share when there has been no change in outstanding

EARNINGS PER SHARE FORMULA

÷ =Net income

Shares of OutstandingCommon

Stock

EPS

Due to its importance, EPS is required to be reported on the face of the income statement.

This amount is usually simply reported below net income on the statement.

Leads, Inc. has net income of $109,200.Assuming that it has 54,600 shares of

common stock outstanding for the year, EPS is $2.00 ($109,200 ÷ 54,600), and is presented as follows:

FINANCIAL STATEMENT Analysis财务报表分析In analyzing and interpreting financial statement information, 3 major characteristics are generally evaluated:1 liquidity 流动性 ,2 profitability 盈利性 , and3 solvency 偿付能力 .

Genlyte Inc. Balance Sheet December 31, 2002Assets Liabilities and Equities Current assets 156000 Current liabilities 70,000

Plant and equipment

74000 Long-term liabilities

114,000

Intangible assets 14000 Equities 60,000

Total assets 244,000 Total L & E 244,000

GENLYTE INC.Income Statement

For the Year Ended December 31, 2002

Net sales $ 430,000Cost of goods sales 295,000Gross profit 135,000Selling and administrative expenses 109,000Income from operations 26,000Other expenses and losses 5,000Income before income taxes 21,000Income tax expense 7,000Net income $ 14,000Earnings per share $ 0.35

FINANCIAL STATEMENTS – GENLYTE INC.

CURRENT RATIO

The current ratio 流动比率 is current assets divided by current liabilities.

With its 2.23:1 ratio, Genlyte’sshort-term debt-paying ability appears to be very favorable compared to reasonable performance standards.

$156,000 ÷ $70,000 = 2.23:1

Current Assets ÷ =Current

LiabilitiesCurrent

Ratio

WORKING CAPITAL

The excess of current assets over current liabilities is called working capital 营运资金 .

For Genlyte Inc., working capital is $86,000, as shown below.

$156,000 - $70,000 = $86,000

Current Assets - =Current

LiabilitiesWorkin

g Capital

PROFIT MARGIN

The profit margin percentage 利润率 measures the percentage of each dollar of sales that results in net income and is calculated by dividing net income by net sales for the period.

Genlyte Inc’s profit margin percentage is 3.3% which seems too low compared to reasonable performance standards.

$14,000 ÷ $430,000 = 3.3%

Net Income ÷ =Net

SalesProfit

Margin Percentage

RETURN ON ASSETS

$14,000 ÷ $244,000 = 5.7%

Net Income ÷ =Total

AssetsReturn on

Assets

Rate of return on assets (ROA) 资产报酬率 is an overall measure of profitability that is calculated by dividing net income by total assets.

Genlyte Inc’s rate of return on assets is relatively low at 5.7% – compared to reasonable performance standards – which suggests that Genlyte may not be using its assets effectively.

RETURN ON COMMON STOCKHOLDERS’ EQUITY

$14,000 ÷ $60,000 = 23.3%

Net Income ÷ =Common

Equity

Return on Common

Stockholders’ Equity

Return on common stockholders’ equity( 权益报酬率ROE) is a measure of profitability that is calculated by dividing net income by common stockholders’ equity.

Genlyte Inc’s return on common stockholders’ equity is quite good at 23.3% compared to reasonable performance standards.

DEBT TO TOTAL ASSETS

$184,000 ÷ $244,000 = 75.4%

Total Debt ÷ =Total

AssetsDebt to Total Assets Ratio

Debt to total assets ratio 资产负债率 is a measure of solvency that is calculated by dividing total debt (liabilities) by total assets.

Genlyte Inc’s debt to total assets ratio is 75.4% which means that Genlyte’s creditors have provided about 3/4 of its total assets.

Homework

• BE7-10• E7-1, E7-6• P7-4A

Chapter 7 Glossary• Generally accepted accounting principles 一般公认的会计原则• conceptual framework( 概念框架 )• decision usefulness 决策有用性relevance 相关 ,

2 reliability 可靠 , and3 comparability 可比性 and consistency 一致性

timely 及时性verifiable 可验证的monetary unit assumption 货币单位假设economic entity assumption 会计主体假设time period assumption 会计期间假设going concern assumption 持续经营假设liquidation value( 清算价值 ),revenue recognition principle 收入确认原则配比原则 ( 费用确认原则 )