ACCOUNTING ASW SUMMER 2007 Mark Lang

OVERVIEW Overview of ASW - work through syllabus Overview of accounting - goals - structure - major financial statements

How large should a company be? Basics What is a company? Why do companies exist? How large should a company be?

Role of Accounting The communication problem - How to condense millions of transactions in a meaningful way With whom does it communicate? - Investors--debt and equity - Employees--CEO, store manager, inventory managers, other employees - Taxing authorities--state and local - Others (government, labor, etc.)

Financial Accounting Why do investors need information? - What to invest in - Performance of management • separation of ownership and control What kind of information do they need? - To forecast: • the amount • timing • uncertainty of future cash flows

Investor Communication Problem: - atomistic investors - diversified investors Answer - generally accepted accounting principles (GAAP)

US GAAP Congress Securities and Exchange Commission Financial Accounting Standards Board - American Institute of CPAs - Emerging Issues Task Force, etc. IASB may change all that

Statement of Cash Flows Notes to the Statements Audit Opinion Basic Statements Balance Sheet net worth Income Statement change in net worth through firm activities Statement of Cash Flows change in cash Notes to the Statements Audit Opinion

Snap shot of the firm at period-end Most basic financial statement Balance Sheet Snap shot of the firm at period-end Most basic financial statement - All others derive from it - Assets - Liabilities - Owners’ Equity

Assets = Liabilities + Owners’ Equity Assets--provide future benefits to the firm - cash or expected to provide cash in future • current--cash, sold or consumed within year • noncurrent--held for longer periods

Liabilities--creditor claims - expected to require future cash outflows • current--due within a year • noncurrent--due later Owners’ Equity-- the residual - contributed capital - retained earnings • RE07 = RE06 + NI07 - Dividends07 - Other07 Other often includes share repurchases I’ll put repurchases and other in dividends for now Problem 1.19

Derives from the balance sheet Income Statement Derives from the balance sheet - change in net assets due to activities - measures whether the firm was profitable - assets = liabilities + retained earnings + contributed capital - RE07 = RE06 + NI07 - Dividends07 • Problem 1.22

Net income = Revenue - Expense Revenues - Sales - Other Expenses - Cost of Goods sold - Selling, General and Administrative - Income Tax Expense

Statement of Cash Flows Derives from the balance sheet - Explains change in cash = Cash06 – Cash05 - Generally begins with net income - Sections • Operating • Investing • Financing Problem 1-29, 1-34

Other Disclosures Notes to the financial statements Audit report accounting policies and details on accounts Audit report Management’s discussion and analysis Segment reporting geographic and industry segments Quarterly results Five-year summary