A201 Ch1

Front 1

profit-seeking companies

Back 1

managers of profit-seeking companies prepare reports containing financial information for the owners of these companies

Front 2

owners and interested parties

Back 2

although prepared primarily for the owners, these financial reports are available to the public and are read by other interested parties

Front 3

user decisions

Back 3

users obtain info from the financial reports that helps assess the company's past performance, predict future performance, and control managerial activities

Front 4

effects of user decisions

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they affect the financial condition and performance of the company and economic well-being of managers

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managers need two perspectives:

Back 5

economic consequences
user orientation

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economic consequence perspective

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considering/understanding how such events affect the financial statements

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user orientation

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managers need to know how to read, evaluate, analyze financial statements

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certified public accountant (CPA)

Back 8

verifies financial statements

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independent audit

Back 9

you demand a certified public accountant (CPA)

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auditor's report

Back 10

short letter written by auditor that describes the activities of the audit and comments on the financial position and operations of the company

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management letter

Back 11

accepts responsibility for the figures on the statements

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internal control system

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safeguards assets and reasonably ensures that transactions are properly recorded and reported

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footnotes

Back 13

notes to help clear up uncertainties on financial statements

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balance sheet

Back 14

assets, liabilities, and stockholders' equity

statement of company's financial position as of a certain date

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assets

Back 15

cash, accts. receivable, equipment, land

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stockholders' equity

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common stock & retained earnings

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income statement

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revenues & expenses

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difference between revenues & expenses =

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net income

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statement of stockholders' equity

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describes changes in the stockholders' equity (either common stock or ret. earnings)

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dividends

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assets paid to stockholders

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statement of cash flows

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summarizes increases/decreases in cash

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operating activities

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concern actual products/services

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investing activities

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purchase/sale of assets (equip., land)

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financing activities

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cash collections & payments
collections from owners' contributions

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earning power

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ability to grow and provide a substantial return to its owners

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debt investment

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if you loan to a company

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loan contract

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specifies maturity date, annual interest, collateral, other debt restrictions

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collateral

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assets to be paid to you in case the principal or interest is not paid back

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historical cost

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dollar amount paid when the assets were acquired

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board of directors

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elected annually by the shareholders to represent their interests

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compensation contracts

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company managers enter into this and/or debt

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corporate governance

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mechanisms encouraging management to act in the interest of the shareholders

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three things that encourage professionalism of managers & auditors

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professional reputation
legal liability
ethics

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consolidated financial statements

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total dollar amounts in the accounts on the financial statements include those of other companies

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subsidiaries

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other companies who have accounts on the financial statements

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industries

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company groups based on nature of their operations

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debt covenants

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designed to reduce risk and encourage business decision making consistent with capital-provider interests

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Securities and Exchange Commission (SEC)

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made in 1934 to implement and enforce the Securities Act of 1933 and the Securities Exchange Act of 1934

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10-k

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audited financial reports

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10-q

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unaudited financial reports

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20-f

Back 41

non-U.S. listed companies are required to file

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annual reports

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published by major U.S. and non-U.S. companies typically include audited balance sheets for the two most recent years and audited statements of income, stockholders' equity, and cash flows for 3 most recent years

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GAAP is for

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America
written by FASB

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IFRS

Back 44

works for non-U.S.
written by IASB

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big 4

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pricewaterhousecoopers
deloitte & touche
ernst & young
KPMG

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PCAOB

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makes auditing standards

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audit committee

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works with management to choose an auditor, and it monitors the audit to ensure that it is thorough, objective, and independent

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Sarbanes-Oxley Act

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passed in 2002, attempt to bolster corporate governance and restore confidence in US financial reporting system

requires principal executive and financial officers to certify that the financial reports have been reviewed, are true, and present performance

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AICPA

Back 49

professional organization of CPAs
has strong professional code of ethics

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not-for-profit accounting

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process of records fund inflows and outflows and reporting them to the public

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managerial accounting

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information not available to the public and is produced strictly for management's own use

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tax accounting

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devoted to understanding and applying the tax law

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4 accounting types

Back 53

financial
not-for-profit
managerial
tax accounting