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Introduction to Financial Accounting

Lecture 1: Introduction

Professor Mingcherng Deng

What is Accounting?

Language of Business Identify, measure, record, and communicate economic events in value terms Provide information for decision-making purposes. Financial Accounting: reporting to decision makers outside the firm Managerial Accounting: reporting to decisionmakers inside the firm

Observations

Accounting produces information Information is costly There are alternative sources of information Users are not a homogeneous group

FASB

FASB's Statement of Financial Accounting Concepts No. 1 (1978): “Financial reporting should provide information that is useful to present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective ... net cash inflows to the related enterprise.” [emphasis added]

IFRS

IASB framework for the preparation and presentation of financial statements: “Objective of financial statements: To provide information about the financial position, performance, and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions.”

Who are the users of financial statements?

Users extract information from financial statements to answer their questions about the firm Financial statements: Balance Sheet Income Statement Statement of Cash Flows Statement of Stockholders’ Equity

Users of Firms’ Financial Information (Demand Side)

Equity Investors

Investment analysis Management performance evaluation

Debt Investors

Probability of default Determination of lending rates

Management

Strategic planning Investment in operations

Employees

Security and remuneration

Who Sets the Rules?

Regulators (e.g., SEC, Congress) FASB (Financial Accounting Standards Board) IFRS (International Financial Reporting Standard) Other (e.g., Professional organizations - AICPA, APB) The general name for these rules is:

GAAP...