Wall Street Prep: Accounting Crash Course
1. What is Account- Accounting is the language of business; it is a standard
ing? set of rules for measuring a company's financial perfor-
mance.
Assessing a company's financial performance is impor-
tant for:
The firm's officers (managers and employees)
Investors
Lenders
General public
Standard financial statements serve as a "yardstick" of
communicating financial performance to the general pub-
lic.
2. Why is Account- Enables managers to make corporate decisions
ing Important? Enables the general public to make investment decisions
3. Who Uses Ac- Used by a variety of organizations - from the federal gov-
counting? ernment to non-profit organizations to small businesses
to corporations
We will discuss accounting rules as they pertain to pub-
licly-traded companies
4. Accounting Reg- Accounting attempts to standardize financial information
ulations and follows rules and regulations
These rules are called Generally Accepted Accounting
Principles (GAAP)
In the US, the Securities and Exchange Commision
(SEC) authorizes the Financial Accounting Standards
Board (FASB) to determine accounting rules
GAAP comes from the Statements of Financial Account-
ing Standards (SFAS) issued by the FASB
, Wall Street Prep: Accounting Crash Course
5. An Overview of A US federal agency established by the US Congress in
the SEC 1934
Primary mission is "to protect investors and maintain the
integrity of the securities markets"
Division of Corporate Finance oversees FASB
6. An Overview of Established in 1973 as an independent body to carry
FASB out the function of codifying accounting standards on the
behalf of the SEC
Composed of seven full-time members appointed for five
years by the Financial Account Foundation (FAF)
Decisions are influenced by:
7. International Fi- Over 100 countries, including the EU, UK, Canada, Aus-
nancial Report- tralia, and Russia, have adopted a unified set of interna-
ing Standards tional accounting standards (IFRS)
(IFRS) Although we have seen unprecedented convergence over
the last few years between US GAAP and IFRS, some
differences remain
, Wall Street Prep: Accounting Crash Course
8. Assumption 1: A company is considered a separate "living" enterprise,
Accounting Enti- apart from its owners
ty In other words, a corporation is a "fictional" being
9. Assumption 2: A company is considered a "going concern" for the fore-
Going Concern seeable future; it is assumed to remain in existence indef-
initely
10. Assumption 3: Financial statements can only show measurable activities
Measurement of a corporation such as its quantifiable resources, its
liability, amount of taxes it is facing, etc.
11. Assumption 4: Companies are required to file annual and interim reports
Periodicity In the US, quarterly and annual financial reports are
required
An accounting year (fiscal year) is frequently aligned with
the calendar year
12. Four Underlying (1) Accounting Entity
Assumptions of (2) Going Concern
Accounting (3) Measurement
(4) Periodicity
13. Principle 1: His- Financial statements report companies' resources at an
torical Cost initial historical cost
Why?
Represents the easiest measurement method without a
need for appraisal and revaluation
Marking resources up to fair value allows for management
discretion and subjectivity, which US GAAP attempts to
minimize by using historical cost
Note: IFRS allows you to write up the asset to fair value,
but most companies use historical value anyways
, Wall Street Prep: Accounting Crash Course
14. Principles 2 and Governs the company's timing in recording its revenues
3: Accrual Ac- (i.e. sales) and associated expenses
counting (Rev- 2) Revenue Recognition: Accrual basis of accounting dic-
enue Recogni- tates that revenues must be recorded when earned and
tion and Match- measurable
ing Principle) 3) Matching Principle: Under the matching principle, costs
associated with making a product must be recorded dur-
ing the same period as revenue generated from that
product
Exercise Answer: 1) 1/4/15; 2) 1/4/15
15. Why can't com- According to the revenue recognition principle, a compa-
panies imme- ny cannot record revenue until that order is shipped to a
diately record customer (only then, is the revenue actually earned) and
these revenues collection from that customer is reasonably assured
and expenses?
16. Why shouldn't a According to the matching principle, costs associated with
company record the production of the product should be recorded in the
an expense when same period as the revenue from the product's sale
it actually buys
the item?
17.
1. What is Account- Accounting is the language of business; it is a standard
ing? set of rules for measuring a company's financial perfor-
mance.
Assessing a company's financial performance is impor-
tant for:
The firm's officers (managers and employees)
Investors
Lenders
General public
Standard financial statements serve as a "yardstick" of
communicating financial performance to the general pub-
lic.
2. Why is Account- Enables managers to make corporate decisions
ing Important? Enables the general public to make investment decisions
3. Who Uses Ac- Used by a variety of organizations - from the federal gov-
counting? ernment to non-profit organizations to small businesses
to corporations
We will discuss accounting rules as they pertain to pub-
licly-traded companies
4. Accounting Reg- Accounting attempts to standardize financial information
ulations and follows rules and regulations
These rules are called Generally Accepted Accounting
Principles (GAAP)
In the US, the Securities and Exchange Commision
(SEC) authorizes the Financial Accounting Standards
Board (FASB) to determine accounting rules
GAAP comes from the Statements of Financial Account-
ing Standards (SFAS) issued by the FASB
, Wall Street Prep: Accounting Crash Course
5. An Overview of A US federal agency established by the US Congress in
the SEC 1934
Primary mission is "to protect investors and maintain the
integrity of the securities markets"
Division of Corporate Finance oversees FASB
6. An Overview of Established in 1973 as an independent body to carry
FASB out the function of codifying accounting standards on the
behalf of the SEC
Composed of seven full-time members appointed for five
years by the Financial Account Foundation (FAF)
Decisions are influenced by:
7. International Fi- Over 100 countries, including the EU, UK, Canada, Aus-
nancial Report- tralia, and Russia, have adopted a unified set of interna-
ing Standards tional accounting standards (IFRS)
(IFRS) Although we have seen unprecedented convergence over
the last few years between US GAAP and IFRS, some
differences remain
, Wall Street Prep: Accounting Crash Course
8. Assumption 1: A company is considered a separate "living" enterprise,
Accounting Enti- apart from its owners
ty In other words, a corporation is a "fictional" being
9. Assumption 2: A company is considered a "going concern" for the fore-
Going Concern seeable future; it is assumed to remain in existence indef-
initely
10. Assumption 3: Financial statements can only show measurable activities
Measurement of a corporation such as its quantifiable resources, its
liability, amount of taxes it is facing, etc.
11. Assumption 4: Companies are required to file annual and interim reports
Periodicity In the US, quarterly and annual financial reports are
required
An accounting year (fiscal year) is frequently aligned with
the calendar year
12. Four Underlying (1) Accounting Entity
Assumptions of (2) Going Concern
Accounting (3) Measurement
(4) Periodicity
13. Principle 1: His- Financial statements report companies' resources at an
torical Cost initial historical cost
Why?
Represents the easiest measurement method without a
need for appraisal and revaluation
Marking resources up to fair value allows for management
discretion and subjectivity, which US GAAP attempts to
minimize by using historical cost
Note: IFRS allows you to write up the asset to fair value,
but most companies use historical value anyways
, Wall Street Prep: Accounting Crash Course
14. Principles 2 and Governs the company's timing in recording its revenues
3: Accrual Ac- (i.e. sales) and associated expenses
counting (Rev- 2) Revenue Recognition: Accrual basis of accounting dic-
enue Recogni- tates that revenues must be recorded when earned and
tion and Match- measurable
ing Principle) 3) Matching Principle: Under the matching principle, costs
associated with making a product must be recorded dur-
ing the same period as revenue generated from that
product
Exercise Answer: 1) 1/4/15; 2) 1/4/15
15. Why can't com- According to the revenue recognition principle, a compa-
panies imme- ny cannot record revenue until that order is shipped to a
diately record customer (only then, is the revenue actually earned) and
these revenues collection from that customer is reasonably assured
and expenses?
16. Why shouldn't a According to the matching principle, costs associated with
company record the production of the product should be recorded in the
an expense when same period as the revenue from the product's sale
it actually buys
the item?
17.
