Financial Reporting I ACCT 321

1. Financial Reporting IACCT 321 Professor David R. Campbell

2. CPA EXAM • Education requirements • http://www.NASBA.org. • PA • NY, • MD • …….

3. New CPA PA RequirementsEffective January 1, 2012 “Candidates may sit for the CPA Exam after they have completed 180 hours of education, including 36 quarter credit hours in accounting subjects approved by SBOA. Candidates, however, will be required to obtain 225 quarter hours of education , including 54 quarter credit hours in accounting subjects before a license is granted.” Signed into law July 2008. http://www.cpazone.org/exam/requirements/index.asp

4. Financial Reporting I • Week 1 Agenda • Syllabus review • GAAP (U.S. – IFRS) • http://www.iasb.org/Home.htm • Basic Elements of financial statements • Assumptions, principles, modifying conventions • Accounting process • Accounting cycle • Adjusting entries • Closing entries • Basic financial statements

5. Characteristics of Financial Accounting • Accounting identifies, measures and communicates financial information. • This information is about economic entities. • Information is communicated to interested parties such as investors, creditors, unions and governmental agencies.

6. Objectives of Financial Reporting by Business Enterprises The objectives as specified in Statement of Financial Accounting Concepts No. 1: • useful ininvestment and credit decisions. • useful in assessingcash flowprospects. • Useful in assessing enterpriseresources (Assets), claims to those resources (Liab) and changes therein.

7. Generally Accepted Accounting Principles (GAAP) • GAAP consist of authoritative pronouncements issued by certain accounting bodies.

8. Securities and Exchange Commission (SEC) Financial Accounting Standards Board (FASB) International Fin. Rpt. Standards (IFRS) Governmental Accounting Standards Board (GASB) American Institute of Certified Public Accountants (AICPA) The Standard Setting Process: Parties Involved

9. House of GAAP LEVEL A 1. FASB Statements, 133 Implementation guidance, Interpretations, Staff Positions 2. AICPAAccounting Research Bulletins 3. AICPAAccounting Principles Board Opinions not superseded by FASB LEVEL B 1. FASB Technical Bulletins 2. AICPA Industry Audit & Accounting Guides 3. AICPAStatements of Position LEVEL C 1. AICPAPractice Bulletins (cleared by FASB) 2. FASB EITF consensus positions LEVEL D 1. FASB Q&As 2. AICPA Practice Bulletins not cleared by FASB 3. Practices that are widely recognized and prevalent generally or in industry If none of the above: • Consider similar types of transactions that are covered in levels A-D • Other accounting literature (e.g., FASB concepts statements, IFRS……

10. Assets Liabilities Equity Investment by Owners Distributions to Owners Comprehensive Income Revenues Expenses Gains Losses Basic Elements of Financial Statements

12. Recognition and Measurement Criteria Basic Assumptions Principles Constraints 1. Historical cost 2. Revenue recognition 3. Matching 4. Full disclosure 1. Cost benefit 2. Materiality 3. Industry practices 4. Conservatism 1. Economic entity 2. Going concern 3. Monetary unit 4. Periodicity

13. The Basic Accounting Equation • Accounting data is represented by the following relationship among the assets, liabilities and owners’ equity of a business: Assets = Liabilities + Owners’ Equity • The equation must be in balance after every recorded transaction in the system.

14. The Double Entry System • Accounting information is based on the double entry system. • Under this system, the two-sided effect of a transaction is recorded in the appropriate accounts. • The recording is done by means of a “debit-credit” convention (set of rules) applying to all accounts.

15. Transaction Two-sided effect Bought furniture for cash Decrease in one asset Increase in another asset Took a loan in cash Increase in an asset Increase in a liability The Double Entry System The system records the two-sided effect of transactions

16. Asset Liability Equity Debit Credit Credit Expense Revenue Debit Credit Normal balance in account The Account and the Debit-Credit Convention

17. Expanded Basic Equation and Debit/Credit Rules and Effects

18. The Debit-Credit Convention Balance increases Balance decreases • Debit entries in an asset account • Debit entries in an expense account • Credit entries in a liability account • Credit entries in equity account • Credit entries in a revenue account • Credit entries in an asset account • Credit entries in an expense account • Debit entries in a liability account • Debit entries in equity account • Debit entries in a revenue account

19. Dividends or Withdrawals Investments by Owners Net Loss Net Income - + Ownership (Equity) Structure Owners’ Equity

20. The Accounting Cycle: Steps 1. Analyze the transaction 2. Journalize the transaction 3. Post the transaction to accounts in ledger 4. Prepare the (unadjusted) trial balance 5. Prepare necessary adjusting journal entries 6. Prepare the adjusted trial balance 7. Prepare financial statements 8. Prepare closing journal entries for the year 9. Prepare the post-closing trial balance

21. Adjusting Journal Entries Adjusting entries are needed for: • Recognizing revenue for the period. • Matching expenses with revenues they helped generate. • Adjusting entries are required every time financial statements are prepared.

22. Adjusting Unearned Revenue Recording Accrued Revenue Revenues received in cash and recorded as liabilities Revenues earned but not yet recorded in books Adjusting Entries: Recognizing Revenue

23. Adjusting Prepayments for Expenses Recording Accrued Expense Prepayments made in cash and recorded as assets Expense incurred but not yet recorded in books Adjusting Entries: Matching Expenses

24. Closing Journal Entries • Closing entries are made to close all nominal accounts (revenue and expense accounts) for the year. • Real (or Permanent) accounts (balance sheet accounts) are not closed. • Dividend account is closed to Retained Earnings account.

25. Scheme of Closing Entries Ret. Earnings Dividends Income Summary 3 4 Expense Revenue 1 2

26. Closing Entries: Periodic Inventory System • In a periodic inventory system, closing entries are made to record cost of goods sold and ending inventory. • In a perpetual inventory system, such entries are not required.