Financial Accounting and Reporting

-Overall liquidity level -Ability to generate revenues from assets and control costs -Capital Structure

determine the accounting standards at the global level through a set of pronouncements called the International Financial Reporting Standards (IFRS)

stipulates a number of qualitative characteristics or general principles that accountants (and other financial professionals) are expected to follow in selecting and apply appropriate accounting polices for their organization

-Relevance -Materiality -Faithful Representation -Comparability -Verifiability -Timeliness -Understandability -Completeness (The Cost Constraint)

-Assets -Liabilities -Equity -Income -Expenses -Cash Flows

-accounting standards that govern the content and form of financial reports. -Developed by Financial Accounting Standard Board (FASB) -SEC enforces GAAP and all publicly trade companies must submit 10-K annually and 10-Q quarterly

-Measurement: most assets and liabilities are reported at a historical cost (must be evidentary basis (i.e. invoice receipt) except marketable securities which are reported at current market value (fair value) - Revenue Recognition: revenue is reported when (1) cash or a claim for cash is received in exchange for goods or services and (2) the earnings process is substantially complete. Typical claim for cash refers to accounts receivables -- the assets that represent revenues from sales that have been recognized, but not yet collected. Once funds are collected AR balance decreases and cash balance increases, without any impact to income - Expense Recognition: Expenses must be reported when the revenues with which they are associated are recognized. This refers to as the matching principle. Long-lived or fixed assets are capitalized (i.e. recorded as assets on the balance sheet) and depreciated over time because they usually produce revenues during the multiple accounting periods. Expenses are reported even though cash has not been paid out (accrual accounting) - Full Disclosure: any information that may influence the judgement and decisions of a user of financial information should be disclosed

records revenues when earned and expenses when incurred, regardless of the timing of cash receipts or payments

Accounting basis in which a company records revenue only when it receives cash, and an expense only when it pays out cash (small nonpublic companies)

-IFRS is principles-base and US GAAP is rules-based -IFRS does not permit last-in, first out (LIFO) inventory methods -IFRS uses a single- step method for impairments write-downs rather than the two-step method used in US GAAP increases probability of write-downs with IFRS -IFRS requires capitalization of development costs once certain criteria are met. US GAAP generally requires development cost to be expensed as incurred, except for costs related to the development of software

establishes a set of controls over audit procedures and disclosure requirements, and provided an administrative vehicle to implement and oversee them.

is an examination of a company's financial statements by an accounting firm independent of the reporting company, in accordance with generally accepted auditing standards

Standard unqualified (clean) unqualified with emphasis (uncertainty) qualified opinion (except for) adverse opinion disclaimer of opinion (don't want to give)

Balance Sheet

Income statement

Cash Flow

Retained Earnings

Contains accounting requirements for annual and interim financial statements filed under both the Securities Act and the Securities Exchange Act.

reports a firm's finanical condition at a specific point in time. (book value at that point in time)
Assets = Liabilities + Shareholders' Equity

are expected to provide future economic benefits for a company. Assets are listed on the balance sheet in order of decreasing liquidity.
Categories -Current Assets (expected to be converted into cash within yr) -Fixed Assets (property, plant and equipment) -Non-current Assets (investments and intangible assets

represent financial obligations that are expected to be repaid with the future economic benefits generated by assets
-Current liabilities (obligations repaid in a yr) -Long-term liabilities ( obligations repaid past a yr)

liability refers to an amount that is owed regardless of the form. Debt however refers to obligations that require interest payments. Debt is a subset of liabilities.

Difference between assets and liabilities, and thus represents what would remain if all assets were sold and all liabilities were repaid.
-Contributed capital: cash invested by shareholders -Retained earnings: represents the accumulation of earnings that are retained from operations. Net income distributed to shareholders as dividend and/or reinvested in the firm. reinvestment represents an addition to retained earnings.

income statement summarizes the profit/loss incurred during the period in question. Ordered in activities most closely associated with primary revenue to least
-Revenues earned -Expenses incurred, including cost of good sold, fixed operating costs, interest, and taxes -Other income and expenses, including FX gains and losses, interest income, and other non operating income and expenses over an accounting period

represents the sum of recognized or earned sales

is the expense associated with providing the goods or services sold. COGS include product cost.

Net Sales - Cost of Goods Sold = Gross Profit

represent general expenses incurred in the course of operations but that are not directly associated with the production of goods and services

non operating activities

Income before taxes- income tax expense

Earnings before interest, taxes, depreciation, and amortization.

Refers to gross profit - operating expenses including depreciation, amortization, interest, and taxes. (Non US GAAP)

Wall Street: thinks better measure of company's operating profitability because it ignores noncash charges. Commonly used as a proxy for cash flow. Indicates the ability to service debt

Earnings before interest and taxes (EBIT). Operating income refers to EBIT. Traditionally used to evaluate a firm's ability to generate operating profits and to meet its financial and tax obligations

Net income adjusted for various gains and losses not reported on the income statement.
Adjustments include -Unrealized gains and losses on investments -Minimum pension liability adjustments -Foreign currency translation adjustments -Changes in the market values of financial instruments qualifying as hedges

provides detailed breakdown of sources and uses of cash throughout certain time period. The statement of cash flow categories cash flows on the basis of whether the cash flow resulted from
-operating activities -investing activities -financing activities

-Decrease in an Asset: the reduction of noncash assets produces funds via an increase in cash flows. ex: As accounts receivables are collected, cash flow increases while the accounts receivable balance is lowered.
- Increase in a Liability: liabilities represent financing, so an increase in a liability increases available funds. ex: The purchase of inventory using trade credit or a bank loan

-Increase in an Asset: a cash outflow occurs when investments in noncash assets occur. ex: purchase of raw materials increases inventory but uses funds.
-Decrease in a liability: Funds are used to repay liabilities. ex cash to pay off loan etc.

A method of preparing a statement of cash flows in which net income is adjusted for items that do not affect cash to determine net cash provided by operating activities

A method of preparing a statement of cash flows in which the gross cash receipts and disbursement without examining any adjustments needed to calculate accrued net income. Operating activities are examined, and total cash flow attributable to each activity is computed. Starts by converting accrual accounts to a cash amount

are financial instruments whose value is dervied from some underlying financial asset. Can be forward, futures, option, and swap contracts

Covers accounting for both derivatives and hedging

Under GAAP guidlines cover accounting for both derivatives and hedging

gain and losses arising from any revaluation of derivatives are reported in current period income, provided the derivative is not designated as a hedge.

if a derivative is designated as a hedge against fluctuations in the value of a specific asset or liability on the balance sheet, then gains and losses of the revaluation are recognized as income or expense together with the offsetting gains and losses of the hedged item.

designed to minimize the fluctuations in the cash flow values of foretasted transactions include cash flow hedge and foreign currency transaction hedges.
-G&L are reported in comprehensive income and not reported in current income until related transactions impact current income

are designed to hedge currency risk associated with the translation of subsidiary (or other foreign operations) financial Statements into the parent firm's functional currency

defined by determining the price that would be received in an asset sale or the price paid to transfer liability. The valuation price mist be market-based and take into consideration all observable valuation inputs, such as competition and risk.

Assets & liabilities must be carried on the balance sheet at fair market value. Effective hedges are booked within comprehensive income on the income statement, while the G&L on the noneffective potion of a hedge booked within net income. Hedge effectiveness is the degree to which changes in fair value or cash flows of the hedged item that are attributable to a hedged risk are offset by changes in the fair value or cash flows of the hedging instrument

determine the correct exchange rate to be used in converting each financial statement line item for the foreign currency to the parent company's functional currency

defined as the currency of the primary economic environment in which the entity operates.

-foreign currency monetary items (i.e., cash or items readily convertible into cash) are translated at the closing exchange rate - Non-monetary items that are reported at historical cost are translated using the exchange rate on the transaction date - Non-monetary items that are reported at fair value in the foreign currency are translated using the exchange rate as the date of the fair value measurement -Resulting exchange differences are reported in comprehensive income

-Assets and liabilities are translated at the closing exchange rate as of the statement date -Income and expenses are translated into the reporting currency at the exchange rate on the transaction date -All resulting exchange differences are reported in comprehensive income

basis for translating foreign financial statements into their reporting or base currency

-The term equity is replaced with fund balance or net worth in the accounting statements. -The focus of reporting is on compliance and accountability as opposed ti profitability. In the US NFPs typically must comply with GAAP, while governments follow the rules and procedures developed by the Governmental Accounting Standards Board (GASB)