1. Financial Accounting Chapter 1
Financial Accounting Chapter 1. Financial Statements and Business Decisions

2. Objectives Identify the economic role of accounting
Recognize the information conveyed in each of the four basic financial statements
Identify the role of Generally Accepted Accounting Principles (GAAP)
Distinguish the roles of managers and auditors

3. Economic Role of Accounting
Accounting is a system that collects and processes (measuring, recording, and analyzing) financial information about an organization and reports that information to decision makers.
Economic Role of Accounting
Valuation: accounting information helps stakeholders assess an entity’s value and enhances the efficiency of resource allocation.
Stewardship: accounting information helps principals monitor and control agents and increases the efficiency of an organization.

4. Financial Accounting
Financial accounting concentrates on the external information users like creditors, investors, suppliers, customers, analysts, and government.
Management accounting concentrates on the internal users like managers for their decision-making such as production planning and controlling.

5. Financial Statements
External information users use financial statements which are included in the firm’s annual report for their decision makings.
Financial statements are statements containing financial information:
Balance Sheet
Income Statement
Statement of Cash Flows
Statement of Retained Earnings.

6. Four Basic Financial Statements
Balance sheet (B/S):
The balance sheet reports the resources of a company (assets), the company’s obligation (liabilities), and the owners’ equity (or shareholders’ equity = SHE).
Assets – Liabilities = SHE.
Income statement (I/S):
The income statement reports the amount of net income earned by a company during a period.
Net income is the excess of revenue over its expenses.
Revenue – Expenses = net income (or net loss)

7. Four Basic Financial Statements (Cont.)
Statement of cash flows:
The statement of cash flows reports the amount of cash collected and paid out by a company during a period.
Cash flows from operating/investing/financing activities
Statement of Retained Earnings:
The Statement of Retained Earnings reports the way that net income and the distribution of dividends affect the financial position of the company during a period.
Beginning R/E + Net income-dividends=Ending R/E

8. Generally Accepted Accounting Principle
The set of accounting standards used at a specific time is described as generally accepted accounting principle (GAAP).
When companies make financial statements, they need to make them according to GAAP. However, for internal use (in management accounting), companies can choose whatever format or data that they want to use.

9. Accounting Regulators
Financial Accounting Standard Board (FASB) is the private organization responsible for establishing the standards (=GAAP) for financial accounting and reporting in the U.S. (equivalent to Korean Accounting Standards Board, KASB).
Security and Exchange Commission (SEC) is the government body responsible for regulating the financial reporting practice in U.S. (but it does not make the accounting standards). This organization is equivalent to Financial Supervisory Service in Korea.

10. Auditors
Auditors
Auditors express an opinion as to the fairness of the financial statement presentation.
Examining the financial reports to ensure compliance with GAAP.
Examining the underlying transactions incorporated into the financial statements.
Independent auditors have responsibilities that extend to the general public.
Certified public accountant (CPA)
Someone who has taken a minimum number of college-level accounting classes and has passed the exam.
CPAs mostly work for accounting firms (such as Big 5 – the largest 5 accounting firms in the world) –and in other organizations such as consulting firms, venture capitals, and securities companies.
The principal duty of an accountant for accounting firm is to audit the financial statements of other companies and express their opinion if the financial statements are prepared under GAAP.