Montclair State University

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Montclair State University

• Accounting 521
• Introductory
• Comments

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Introductory Comments
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Montclair State University

• Accounting 521
• Miscellaneous
• Financial

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ConceptualFrameworkofAcounting
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Conceptual Framework
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Objectives
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Objectives

• Provide information useful in investment and
  credit decisions

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Objectives

• Provide information useful in investment and
  credit decisions
• Provide information useful in assessing future
  cash flows

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Objectives

• Provide information useful in investment and
  credit decisions
• Provide information useful in assessing future
  cash flows
• Amount
• Timing
• Uncertainty

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Objectives

• Provide information useful in investment and
  credit decisions
• Provide information useful in assessing future
  cash flows
• Provide information about enterprise resources,
  claims to resources and changes in them.

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Principal Financial Statements

• Balance Sheet

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Balance Sheet

• A summary of the assets, liabilities, and owners
  equity of an accounting entity as of a given date

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Balance SheetAlternative Titles

• Statement of Financial Position
• Statement of Financial Condition
• Position Statement

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Balance Sheet Title
2000 1999 1998 1997 Balance
Sheet ........................ 571 569 569 565 Sta
tement of Financial Position 27 28 27 30 Statemen
t of Financial Condition ....................
....... 2 3 4 5 Total Companies ..................
.. 600 600 600 600
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Principal Financial Statements

• Balance Sheet
• Income Statement

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Income Statement
A summary of the revenues and expenses of an
accounting entity for a given period of time
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Income StatementAlternative Titles

• A
• Statement
• Report

• B
• Income
• Profit and Loss
• Earnings
• Operations

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Income Statement Title
2000 1999 1998 1997 Income .............
.................... 284 296 298 299 Operations ..
......................... 198 186 180 173 Earnings
.............................. 108 114 117 122 Ot
her .................................... 10 4 5 6
Total Companies ............ 600 600 600 600
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Principal Financial Statements

• Balance Sheet
• Income Statement
• Statement of Cash Flows

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Statement of Cash Flows
A summary of cash inflows and outflows for a
period of time
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Qualitative Characteristics

• Primary
• Secondary

OBJECTIVES
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Qualitative Characteristics

• Primary
• Relevance
• Reliability
• Secondary

OBJECTIVES
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Qualitative Characteristics

• Primary
• Relevance
• Feedback value
• Predictive value
• Timeliness

OBJECTIVES
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Qualitative Characteristics

• Primary
• Reliability
• Verifiability
• Representational faithfulness
• Neutrality

OBJECTIVES
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Qualitative Characteristics

• Primary
• Relevance
• Reliability
• Secondary
• Comparability
• Consistency

OBJECTIVES
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Basic Underlying Assumptions
OBJECTIVES
QUALITATIVE CHARACTERISTICS
ELEMENTS
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Basic Underlying Assumptions

• Economic Entity

OBJECTIVES
QUALITATIVE CHARACTERISTICS
ELEMENTS
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Basic Underlying Assumptions

• Economic Entity
• Monetary Unit

OBJECTIVES
QUALITATIVE CHARACTERISTICS
ELEMENTS
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Basic Underlying Assumptions

• Economic Entity
• Monetary Unit
• Going Concern

OBJECTIVES
QUALITATIVE CHARACTERISTICS
ELEMENTS
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Basic Underlying Assumptions

• Economic Entity
• Monetary Unit
• Going Concern
• Time Period

OBJECTIVES
QUALITATIVE CHARACTERISTICS
ELEMENTS
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Elements of Financial Statements
Income Statement Revenues
OBJECTIVES
QUALITATIVE CHARACTERISTICS
ELEMENTS
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Elements of Financial Statements
Income Statement Revenues Expenses
OBJECTIVES
QUALITATIVE CHARACTERISTICS
ELEMENTS
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Elements of the Income Statement

• Revenue
• Inflows of assets from activities that constitute
  the entitys central operations

McMenimen CompanyIncome StatementFor the Year
Ended December 31, 19x1 Net Sales 95,000 Cost of
Goods Sold 50,000 Gross Margin 45,000 Operating
Expenses Selling 10,000 General and
Administrative 15,000 Income Before Income
Taxes 20,000 Income Taxes 6,000 Net
Income 14,000
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Revenue Recognition

• Revenue
• all efforts needed to earn revenue have been
  completed
• an exchange with independent party

OBJECTIVES
QUALITATIVE CHARACTERISTICS
ELEMENTS
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Revenue Recognition

• will production be completed?
• will the product be salable?
• what will the selling price be?
• will the sales price be collectible?
• will the sale be negated?

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Revenue Recognition
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Revenue Recognition

• Throughout Production/Sale Period

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Revenue Recognition

• Throughout Production/Sale Period
• Upon Completion of Production

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Revenue Recognition

• Throughout Production/Sale Period
• Upon Completion of Production
• Point of Sale

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Revenue Recognition

• Throughout Production/Sale Period
• Upon Completion of Production
• Point of Sale
• Upon Receipt of Cash

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Revenue Recognition

• Throughout Production/Sale Period
• Upon Completion of Production
• Point of Sale
• Upon Receipt of Cash
• Sale Confirmed

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Income Determination

• Throughout Production/Sale Period
• Upon Completion of Production
• Point of Sale
• Upon Receipt of Cash
• Sale Confirmed

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Income Determination

• Revenues Inflows of assets from the
  entitys ongoing major or central
  operation

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Income Determination

• Revenues Inflows of assets from the
  entitys ongoing major or central
  operation
• Expenses Outflows of assets from the
  entitys ongoing major or central
  operation

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Expense Recognition

• Matching Principle
• Against the revenues of a time period we should
  match the related expenses

OBJECTIVES
QUALITATIVE CHARACTERISTICS
ELEMENTS
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Expense Recognition

• Matching Principle
• Cause and Effect
• Systematic and Rational Allocation
• Immediate Recognition

OBJECTIVES
QUALITATIVE CHARACTERISTICS
ELEMENTS
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Elements of Financial Statements
Income Statement CostsGainsLosses
OBJECTIVES
QUALITATIVE CHARACTERISTICS
ELEMENTS
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Elements of Financial Statements
Costs sacrifice incurred in economic activities
OBJECTIVES
QUALITATIVE CHARACTERISTICS
ELEMENTS
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Elements of Financial Statements
Gains increases in net assets fromperipheral
transactions
OBJECTIVES
QUALITATIVE CHARACTERISTICS
ELEMENTS
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Elements of Financial Statements
Losses decreases in net assets fromperipheral
transactions
OBJECTIVES
QUALITATIVE CHARACTERISTICS
ELEMENTS
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Elements of Financial Statements
Comprehensive Income includes all changes in
equity except those resulting frominvestments by
and distributions to owners
OBJECTIVES
QUALITATIVE CHARACTERISTICS
ELEMENTS
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Accrual Basis Accounting

• recognize revenues when earned rather than when
  cash is paid
• recognize expenses when incurred rather than paid

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Accrual Basis AccountingnotCash Basis Accounting
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Accruals and Deferrals

• Accrued Revenues
• Accrued Expenses
• Prepaid (Deferred) Revenues
• Prepaid (Deferred) Expenses

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Accruals and Deferrals

• Accrued Revenues
• revenue earned, but not received (revenue
  receivable)
• Accrued Expenses
• expense incurred, but not paid (expense payable)

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Accruals and Deferrals

• Prepaid (Deferred, Unearned) Revenues
• cash is received, but revenue is not earned
  (prepaid income)
• Prepaid (Deferred) Expenses
• cash is paid, but expense is not incurred
  (prepaid expense)

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Accruals and Deferrals

• Accrued Revenues
• Accrued Expenses
• Prepaid (Deferred) Revenues
• Prepaid (Deferred) Expenses
• Inventories
• Merchandise
• Supplies

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Elements of Financial Statements
Balance Sheet Assets Liabilities Owners Equity
OBJECTIVES
QUALITATIVE CHARACTERISTICS
ELEMENTS
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Assets

• Probable future economic benefits obtained or
  controlled by a particular entity as a result of
  past transactions or events

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Liabilities

• Probable future sacrifices of economic benefits
  arising from present obligations to transfer
  assets or provide services to other entities in
  the future as a result of past transactions or
  events

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Owners Equity

• The financial interests of the owners arising
  from the initial, and possibly subsequent,
  investments and accumulated profits

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AssetsSummary

• Current Assets
• Long-Term Investments
• Plant, Property and Equipment
• Intangible Assets
• Other Assets

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AssetsSummary

• Current Assets
• Long-Term Investments
• Plant, Property and Equipment
• Intangible Assets
• Other Assets

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Current Assets

• Cash and other assets reasonably expected to be
  realized in cash or sold or consumed during one
  year or the normal operating cycle, whichever is
  longer

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Assets

• Current Assets
• Cash
• Temporary investments
• Receivables
• Inventory
• Prepaid expenses
• Long-Term Investments
• Investments in bonds
• Investments in stock
• Plant, Property and Equipment
• Land
• Buildings
• Intangible Assets
• Other Assets

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Assets

• Current Assets
• Cash
• Temporary investments
• Receivables
• Inventory
• Prepaid expenses
• Long-Term Investments
• Investments in bonds
• Investments in stock
• Plant, Property and Equipment
• Land
• Buildings
• Intangible Assets
• Other Assets

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Miscellaneous Financial