Kế toán, kiểm toán - Chapter 1: financial accounting and its economic context

2Chapter 1:Financial AccountingandIts Economic Context 3Discuss the role of financial reports in investment decisions and the difference between the economic consequence and user perspectives.Learning Objective 14The Role of Financial Reporting in Investment DecisionsProfit-seeking companies - managers prepare reports for owners of the companies.Owners and other interested parties (users) - use reports to assess financial condition and performance of companies.User decisions - users obtain information from reports to make investment decisions.Effects of user decisions - decisions affect the company and its managers because of the need for capital5Financial Reporting and Investment Decisions6Explain the difference between consumption and investment and why investors demand documentation and independent audits.Learning Objective 27Consumption and InvestmentConsumptionPurchase of goods and services for enjoyment with no future valueInvestmentLittle immediate gratification, generates returns for a later dateDocumentation provides information to investorsIndependent audits of the documentation provides verification by an independent third party, a certified public accountant (CPA) 8Concept Practice 2 9Describe the standard audit report, management letter, four financial statements, and related footnotes.Learning Objective 310Content of Financial Reports The Auditor’s ReportThe Management LetterThe Financial Statements: Balance Sheet Income Statement Statement of Shareholders’ Equity Statement of Cash FlowsThe Footnotes 11The auditor’s report is a statement to the board of directors of the company and to the shareholders of the company.It expresses an opinion as to whether the financial statements present fairly the financial activities of the company and whether the financials were prepared in accordance with GAAPThe Auditor’s Report12The Management Letter The management letter is the statement of management to the investors. It indicates:Management is responsible for the preparation and content of the financial report.The statements were prepared in accordance withGenerally accepted accounting principles (GAAP).The company maintains a system of internal controls to safeguard assets. 13Financial Statements (Balance Sheet) 14Financial Statements (Bal. Sheet cont.)15Financial Statements (Income Statement & Statement of Shareholder’s Equity)16Financial Statements (Statement of Cash Flows)17The Footnotes Integral part of the financials, and explain many of the policies and assumptions used to prepare the financials.18A statement that “the financial statements were prepared in accordance with generally accepted accounting principles” is found in the a. collateral.b. stock market.c. footnotes to the balance sheet.d. auditor’s report.19A statement that financial statement information “is the responsibility of company” issuing the statements is found in thea. footnotes of the financial statements.b. loan contract.c. management letter.d. board of directors’ report.20Differentiate debt from equity and the concepts of solvency and earnings power.Learning Objective 421Make a DecisionAnalysis of Financial StatementsCash positionSolvencyEarning powerRatio AnalysisForm of InvestmentDebt (Loan)Equity (Ownership)22Providers of Capital - RolesProvide capitalequity capital through stock investmentsdebt capital through bond and loan investments (creditors)Receive returnsequity investors receive dividendscreditors and bond investors receive interestStock (Equity) investors choose board of directorsBoard of directors Select corporate officers (management)Set company policySelect audit committeeManagement – runs the company23Concept Practice 4 24List the major elements of the environment in which financial reports are prepared and used and describe how these elements encourage effective corporate governance.Learning Objective 525The Economic Environment of Financial ReportsProviders of capital - debt and equity investorsReporting entitiesCorporate governanceFinancial information users and capital marketsDebt covenants and management compensationSarbanes-Oxley ActLegal liabilityProfessional reputation and ethicsFinancial reporting regulations and standards.26Reporting Entities and IndustriesReporting entities are called companies, businesses and firms.The companies may be further divided into segments and subsidiaries, which may provide their own financials.Consolidated financials are prepared when subsidiaries are combined with the parent’s financials.Industries are important to understand when analyzing financial statements27Corporate GovernanceFinancial Information Users Financial statements are used by a variety of groups.Equity investors: Purchase shares of stock, which represent ownership in the company. The financials are used by investors to analyze management’s decisions.Debt investors (creditors): Provide capital through loans. The financials are used by creditors to assess likelihood of default.Management: Uses other companies’ financials to asses the competition.Others, including government bodies, labor unions, employees, use financials to assess the financial status of the company.28Corporate Governanceand Capital MarketsCapital markets value the publicly traded equity and debt securities.The financials are a component of the information that the markets use to value companies securities, along with a number of nonfinancial measures.The market reacts to financial and other information as it is released by management.29Debt Covenants and Management CompensationDebt covenants are part of debt contracts between the company and creditors. Violation of debt covenants may lead to more costly debt terms.Management compensation contracts often base pay on certain income or stock price goals. Such goals are designed to encourage certain management behavior.30Independent Auditors and Sarbanes-OxleyAn independent audit is conducted in accordance with standards established by the Public Company Accounting Oversight Board (PCAOB). This includes presentation in accordance with generally accepted accounting principles (GAAP). The Sarbanes Oxley Act of 2002Executive and financial officers must certify financial reports are fairly statedInternal controls are in place Emphasis on the quality of financial statement user information31Independent AuditorsAudit reports provide assurance on the fair presentation of the financial statements and effectiveness of internal controls.32Legal LiabilityManagement is legally responsible to the shareholders to act in their interest.Auditors are legally responsible to the shareholders to conduct a thorough and independent audit.If management or auditors fail in their duties, investors and others may sue to recover any losses that might occur as a result of the failure. Many recent examples of management and audit failure exist: Enron, WorldCom (MCI), HealthSouth, Xerox, and Rite Aid.33Professional Reputation and EthicsEthical behavior is in the long-run interest of managers, shareholders, and auditors.Many companies, universities, and professional organizations have enacted increased emphasis on ethics.Auditors’ reputations are integral to their ability to perform their duties. High ethical conduct is imperative to their continued success.34The advantage to the user of financial accounting statements that are audited by independent certified public accountants (CPAs) is assurance that thea. statements are produced in accordance with generally accepted accounting principles.b. company will be solvent for at least one more year.c. company cannot remain profitable for more than 2 to 3 years.d. company pays its fair share of income taxes.35GAAP is an acronym fora. General Asset Accounting Procedures.b. Government Agency Accounting Procedures.c. Generally Accepted Accounting Principles.d. Global Accounting Activity Principles.36Summarize the current status of accounting standard setting – both in the United States and internationally.Learning Objective 637The Securities and Exchange Commission (SEC) governs financial reporting for publicly traded companies. Congress and other regulatory agencies have influence with the SEC.The Financial Accounting Standards Board (FASB) is responsible for the promulgation of generally accepted accounting principles (GAAP) for financial statements. The FASB accepts input from all interested parties, including accountants, corporations, academics, and governmental entitiesThe International Accounting Standards Board (IASB) establishes International Financial Reporting Standards (IFRS) which are an internationally accepted set of standards also used by some companies in the United States.Regulations and Standards38Concept Practice 6 39Concept Practice 6 – cont. 40Discuss other kinds of accounting.Appendix - Learning Objective 741Three Other Kinds of Accounting *Appendix 1AThere are three other types of accounting, besides financial accounting:Not-for-profit accountingFund accounting for public entities like citiesManagerial accountingUsed for specific internal business decision makingTax accountingApplying IRS tax law to business operations 42Wiley © 2017