WGU C213 Accounting for Decision Makers (MBA HCM)

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letiz Accountingrecording of the day-to-day financial activities of a company and the organization of that information into summary reports used to evaluate the company's financial status.Bookkeepingpart of accounting that refers to the process of recording transactions into various accounts, which is the first step in accounting. The next step is to analyze the accounts and organize them into financial statements and other useful reports.(Reference topic 1.1) Three Financial Statementsincome statement, balance sheet, statement of cash flows Balance Sheetfinancial statement that reports assets, liabilities, and owner's equity at a point in time Income Statementfinancial statement that reports the amount of net income earned by a company during a period. Net income is the excess of a company's revenues over its expenses. It reports the financial performance of a firm over a period of time.Statement of Cash Flowsfinancial statement that reports the amount of cash collected and paid out by a

company in the following three types of activities: operating, investing, and

financing over a period of time. (Reference topic 1.2) Users of financial statementsowners, board of directors, managers, creditors, employees, governmental agencies, financial analysts, etc Lendersuse companies' financial statements in making decisions about commercial loans.The financial statements are useful because they help predict the future ability of the borrower to repay the loan.

Investorsindividuals that want information to help them estimate how much cash they can expect to directly receive from the business in the future if they invest in it now.company managementUses financial accounting data to set goals, compute bonuses, and identify weaknesses.Suppliers and Customersuse financial statements to tell them about the long-run prospects of a company.The American Institute of Certified Public Accountants

(AICPA)

the professional organization of certified public accountants (CPAs) in the United States that sets ethical standards for CPAs, provides continuing education for them, writes and grades the CPA exam, lobbies for legislation favored by CPAs, and provides other support to CPAs.*Its oversight of the CPA exam is its main role in accreditation. However, to be accredited as a CPA you must meet the requirements of the state in which you plan to practice.*The requirements for each state are set by that state's legislature and overseen by that state's Board of Accountancy, which is a state agency. (Reference Topic 1.5) Public Company Accounting Oversight Board (PCAOB) determines who can audit public companies regardless of whether the audit firm is accredited by a state Board of Accountancy. Thus, they accredit firms that can audit public companies.Current Trends Causing Changes in Accounting Globalization and Technology Components of Balance Sheetassets, liabilities, owner's equity Accounting Equation and Balance Sheet Equation Assets = Liabilities + Owner's Equity Components of the Income Statementrevenues, expenses, net income Multi-Step Income Statementan income statement that reports multiple levels of income (or profitability) Sales or revenues

• Cost of goods sold (COGS) (Product costs of items sold)

= Gross profit

• Selling and Administrative expenses (also called operating expenses)

= Operating income or earnings before interest and taxes (EBIT)

• Other income - other expenses + gains - losses

= Earnings before taxes (EBT)

• Taxes

= Net Income (Profit) Components of the Cash Flow Statementoperating activities, investing activities(company investing in self), financing activities (stockholders/creditors) Four Main Ideas that Must Be Covered in Financial Statement Footnotes A summary of significant accounting policies.Additional information about the summary totals found in the statements.Disclosure of important information not recognized in the statements.Supplementary information required by the Financial Accounting Standards Board (FASB) or the Securities and Exchange Commission (SEC).

Summary of Significant Accounting PoliciesMain idea required in financial statement footnote. GAAP frequently allows firms to make choices in preparing their financial statements and so GAAP requires that those choices be reported in the footnotes. For example, the firm must report the method they are using to calculation depreciation along with the average useful lives for major classes of depreciable assets.Additional information about the summary totals found in the statements.Main idea required in financial statement footnote.For example if a firm as a notes payable account in their long-term liabilities, they must list all the individual notes that make up the balance and present the life of the loan and its interest rate.Disclosure of important information not recognized in the statements.Main idea required in financial statement footnote.For example, if the firm is the defendant in a lawsuit but the outcome of the suit is unclear, the firm must report the existence of the suit in the footnotes. Since the outcome is uncertain, GAAP does not require the firm to accrue a liability for the possible loss thus the possible loss has not been recognized in the financial statements (i.e., no liability has been reported on the balance sheet).Supplementary information required by the Financial Accounting Standards Board (FASB) or the Securities and Exchange Commission (SEC).Main idea required in financial statement footnote. This is a broad category. One example is reporting summary financial data for different segments of the firm operates in different industries.Purpose of an External AuditAudit conducted by external (independent) qualified accountant(s). These accountants are usually CPAs, but they may not be.Firms hire independent external auditors for a variety of reasons. In some cases, laws and regulations mandate that they do so. Aside for regulations, firms benefit when raising funds through stock sales or by borrowing by being able to show the potential investor or creditor that their financial statements have been audited because that increases the credibility of those financial statements.ComparabilityInformation that becomes much more useful when it can be related to a benchmark or standard. Also, other firm's results or the firm's own history.Materialitywhether an item is large enough to likely influence the decision of an investor or creditor ConservatismA pervasive factor in accounting that can be summarized as follows: when doubt exists concerning two or more reporting alternatives, users should select the alternative with the least favorable impact on reported income, assets, and liabilities.Articulationthe three primary financial statements are not isolated lists of numbers but are an integrated set of reports on a company's financial status. The statement of cash flows contains the detailed explanation for why the balance sheet cash amount changed from beginning of year to end of year. The income statement, combined with the amount of dividends declared during the year, explains the change in retained earnings shown on the balance sheet. Cash from operations on the statement of cash flows is transformed into net income through the accounting adjustments applied to the raw cash flow data.

The three main sections of the Balance SheetAssets, Liabilities, and Equity.Both assets and liabilities are further separated into current and long term based on whether the asset is expected to be consumed or the liability paid within a year. Assets expected to be consumed and liabilities expected to be paid within a year are current and those that will be consumed or paid after a year are long- term.Equity on balance sheetseparated into paid in capital (also referred to as capital stock) and retained earnings. Paid in capital is created when an owner buys stock from the firm.Retained earnings are the accumulated earnings of the firm (i.e., net income over time) that have not been paid back in dividends. Paid in capital also is referred to as contributed capital while retained earnings is earned capital.Liquiditythe ease with which an asset can be converted into cash Purpose of Net IncomeThe accountant's attempt to summarize in one number the overall economic performance of a company for a given period.Revenue recognition and cost/expense matching the core of accrual accounting. They insure that only and all revenue that has been earned in a given period is reported on the Income Statement and that all costs and expenses incurred to generate that revenue is include on the income statement for the same period.When can revenue be recognized?when the entity satisfied a performance obligation - satisfied by transferring control of a good/service either at one point in time or over time three matching principles*direct matching *systemic and rational allocation *direct expensing Direct Matchingapplies to product costs, which are recorded in cost of goods sold for the period.A firm will calculate the cost of producing each product (as described in Topics 9 and 10) and place the item and its costs in inventory. When the item is sold, the costs as well as the item come out of inventory. The item is delivered and the costs included in cost of goods sold. Thus, the product's costs are directly matched to its selling price in the period it was sold and the revenue recognized.Systematic and Rational Allocationapplies to product costs allocated among periods in which benefits are provided (e.g., depreciation, allocation of prepaid costs) Direct Expensingapplies to period costs except for those that are systematically allocated. Any expense that contributed to generating revenue in a period is included in the income statement for that period, i.e. matched to the revenue it helped generate.