Financial Accounting I

1. Financial Accounting I Session 1 – March 26, 2001 Professor William F. Bentz Fisher College of Business A&MIS 521

2. Agenda for Today • Introduce myself • Outline the major global forces shaping your career opportunities and what we do in this class • Outline the primary users of financial statements and their needs for information • Distribute syllabus and talk about course requirements A&MIS 521

3. Agenda for Today-II • Complete an information form • Review subject matter of A&MIS 521 A&MIS 521

4. Who am I? A&MIS 521

5. Self Introduction • Education - B.A. (Economics-Cincinnati), MAcc., Ph.D. (OSU) • Employed by Hopewell Dairy, Inc., The Austin Co., Ralston Purina Co., Pickerington Creamery, Inc., General Motors Corp., Ernst & Ernst, University of Kansas, University of Oklahoma, and The Ohio State University. ~ A&MIS 521

6. Self Introduction Continued • Certified Public Accountant • Active in the American Accounting Association, Financial Executives Institute, Institute of Management Accountants, and other professional committees. • Research in linear planning and control system models A&MIS 521

7. Some Current Activities • Board of Columbus Chapter of Financial Executives Institute • Past Chair of State Board of Accountancy Scholarship Advisory Committee A&MIS 521

8. Trends in Political Economy • Technology revolution • Globalization of business • Global markets are increasingly competitive • Demographic shifts in the work force and marketplace • Privatization of large enterprises • Increasingly democratic institutions A&MIS 521

9. Implications for Accounting & Finance • The automation of information systems has changed the nature of accounting and the other business functions. • Even new employees must interact with many levels of management early in their careers. A&MIS 521

10. More Implications for Acct. & Finance • The ability to use technology is now a required skill. • The mix of accounting and finance positions has changed. • Consulting & outsourcing continue to fuel the growth of specialization A&MIS 521

11. Questions or comments? A&MIS 521

12. What is an investor? Invest--to put (money) to use, by purchase or expenditure, in something offering potential profitable returns, as interest, income, or appreciation in value. Webster’s Dictionary A&MIS 521

13. Investments • Is a certificate of deposit at a bank? • Is a money market checking account an investment? • Is a life insurance policy an investment? • Is a non-interest bearing account an investment? A&MIS 521

14. Investments • Is a residence also an investment? • Is an education an investment? • Is a small business an investment? • Is a lottery ticket an investment? A&MIS 521

15. Invest “To put (money) to use,by purchase or expenditure,in something offering potential profitable returns, as interest, income, or appreciation in value.” The Random House Dictionary of the English Language (2nd edition) A&MIS 521

16. In other words... • Commitment of resources with economic value (e.g., cash, land, buildings, equipment, vehicles, etc.) • Expected benefits (probability  amount): • Income (revenues - expenses) • Gains from appreciation in value (sale value minus cost) • Cost savings (current costs - proposed costs) A&MIS 521

17. Financial Statement Users Equity investors Individual investors Individual Retirement Accounts (IRAs) Brokerage accounts & mutual funds Direct investments in companies Venture capitalists A&MIS 521

18. Financial Statement Users • Equity investors (continued) • Institutional investors • Insurance companies • Retirement funds (private and public) • Mutual fund providers • Real Estate Investment Trusts • Banks • Other corporations A&MIS 521

19. Financial Statement Users • Debt investors (lenders) • Individual investors • Savings accounts and certificates of deposit • Individual Retirement Accounts (IRAs) • Brokerage accounts • Mutual funds A&MIS 521

20. Financial Statement Users • Debt investors (continued) • Institutional investors • Insurance companies • Retirement funds (private and public) • Mutual fund providers • Real Estate Investment Trusts • Banks • Other corporations A&MIS 521

21. Other Statement Users • Customers • Individuals • Companies • Professional service firms • Suppliers • Employees A&MIS 521

22. Other Statement Users • Government • Internal Revenue Service • Federal Trade Commission • Council of Economic Advisors • Federal Reserve System A&MIS 521

23. Learning About Investors Accounting exists to provide information to manage the operations of enterprises and to report the results of those operations to interested parties. So let’s consider some of the basics about different classes of external investors. A&MIS 521

24. Stock Investment Styles • Stock pickers • Growth stocks • Value stocks • Market timers • Index investors A&MIS 521

25. Growth Stock Investors • Look for consistent growth in earning per share, total net income, revenue or market share • Hope to find “growth” stocks before others do • Momentum investors looking for increasing rates of high growth • Higher growth rates justify higher prices A&MIS 521

26. Value Stock Pickers • Look for stocks undervalued by the market at the moment • Example--natural resource companies with valuable assets not valued at market • Example--cyclical companies • Example--stocks of good companies that may be out of favor for awhile A&MIS 521

27. Value Stock Pickers (Cont.) • Measures of value include Price-Earnings Ratios (current price per share /earnings per share) • Evidence of unrecorded liabilities (environmental damage, unfunded pension plans, tobacco products) • Cash flows available for expansion, reinvestment or stock buy-back. A&MIS 521

28. Value Stock Pickers (Cont.) • Funds invested in other entities that could be converted to business uses. • Assets that have market or strategic values greatly in excess of book value. A&MIS 521

29. Users of statements have • varied, if not conflicting needs for information, • diverse levels of financial expertise, • widely varying access to management plans and expectations, and • differing cost-benefit ratios for both public and private information. A&MIS 521

30. Comments or Questions? A&MIS 521

31. Today’s Quote • Nothing in the world can take the place of PERSISTENCE. • Talent will not; nothing is more common than unsuccessful men with talent. • Genius will not; unrewarded it's almost a proverb. • Education will not; the world is filled with educated derelicts. • PERSISTENCE and DETERMINATION alone are omnipotent. _Calvin Coolidge A&MIS 521

32. Shifting Gears Now that we have learned a little something about the needs of different types of investors, let us consider how we are going to meet the needs of those investors. In part, we address those needs through the financial reporting process. A&MIS 521

33. Investor Needs • Access to objective, verifiable information about investments both before and after an initial investment. • Safe place to buy and sell securities • A “fair” investment process • Protection from the bad guys • Access to expert, professional advice A&MIS 521

34. EXCHANGES SEC FASB Company AUDITORS INVESTORS & AGENTS The “Players” SEC A&MIS 521

35. Roles in Financial Reporting • Company’s responsibility to report in accordance with GAAP. • The auditor provides assurances about the company’s financial statements. • Stock exchanges monitor trading in each security and listing company compliance with exchange rules. A&MIS 521

36. Roles in Financial Reporting • FASB issues new reporting standards • SEC monitors companies, their auditors, and the FASB standard setting process. • Various professional organizations and committees issue guidance regarding emerging issues and interpretation matters. A&MIS 521

37. Your Agenda • Obtain a copy of the syllabus • Hand in completed information forms • Read chapter1 of text • Activate your OSU e-mail account and have it pointed to other e-mail accounts A&MIS 521

38. Questions? A&MIS 521

39. Agenda: Wednesday, 3/26/2001 • Answer your questions • Discuss the FASB conceptual framework described in chapter 2 A&MIS 521

40. Objectives of Financial Reporting • To provide information useful to present and potential investors, creditors, and other users for making rational investment, credit, and similar decisions. A&MIS 521

41. Objectives of Financial Reporting • To provide information about the amount, timing, and uncertainty of future cash flows. • To provide information about enterprise resources, claims of different investor groups to those resources, and changes in those resources. A&MIS 521

42. In other words, The objective of financial reporting is to provide information about the financial characteristics--including liquidity, solvency, profitability, risks, and financial flexibility--of an enterprise. A&MIS 521

43. Profession of Accounting • Organize information systems to maintain a historical record, to enhance the integrity of financial information, and to comply with laws and regulations. • Improve the communication of financial information A&MIS 521

44. Profession of Accounting • Develop and implement controls to protect the assets of the enterprise • Reduce fraud • Enhance accountability • Facilitate stewardship • Professional standards of ethical behavior assure the integrity of financial information A&MIS 521

45. The Professional Model • Specialized, technical education • Laws and administrative rules governing entrance and continued participation in the profession (to protect the public) • Education • Experience • Professional examinations • Peer review processes A&MIS 521

46. Subject Matter of A&MIS 521 • We study the major ideas, concepts and issues involved in financial reporting (chapter 1 & 2). • We study the accounting process (chapter 3) to better understand the framework used to organize and report transactions in business and government. The accounting model is used world-wide. A&MIS 521

47. Subject Matter of A&MIS 521 • We study the primary financial statements used by corporations to report to public shareholders and other market participants (chapters 4, 5 & 24) • We apply fundamental accounting concepts to the recognition of revenue and the allocation of selected costs (chapters 6, 11 & 19) A&MIS 521

48. Subject Matter of A&MIS 521 • In this context, financial reporting is concerned with (1) measuring income, (2) valuing wealth, and (3) reporting cash flows. • “Quality” reporting to market participants is our objective. A&MIS 521

49. Subject Matter of A&MIS 521 • Only 8+ chapters covered • Focused coverage • Topics are interconnected and overlapping • Web of ideas, not a step-by-step linear sequence A&MIS 521

50. How to Succeed in Accounting • Get off to a fast start. The end of the quarter is hectic. • Always come to class with some understanding of the topic assigned. • Ask questions and more questions. • Work problems and more problems. • Get the best access to the internet that you can afford. A&MIS 521