Finance and Accounting for Managers Lesson 1

Periodicity

A company discloses its financial statements on a regular, recurring basis (e.g., annually or quarterly).

Unlimited life

A corporation continues in its current form when an individual investor dies. The deceased's stock in the corporation merely transfers to his or her estate.

Monetary unit

A firm report all financial statement accounts in terms of currency (i.e., dollars for U.S. firms).

Financial Accounting Standards Board (FASB)

A working relationship between the public and private sectors determines the authoritative standards that constitute GAAP in the United States.

profit maximization

All other goals, such as employing people and meeting social needs are secondary and subservient to the ______ motive.

External Auditors

Attest to data and form opinion that financial statements are prepared in conformity with GAAP. Unbiased opinion on fairness of financial statements for third party who will rely on the statements to make investment choices. They can rely on the work performed by Internal Audit.

Internal Auditors

Attest to data that conforms to standards established by Management, Focus on efficiency as well as effectiveness and Internal Controls

Unlimited liability

Business owners are personally liable for business obligations in the event their business defaults. This means that creditors of a proprietorship or partnership can place a claim on the personal assets of the owners—such as their homes, cars, and savings accounts—in an attempt to collect an outstanding business debt.

Limited liability

Corporate owners' exposure to loss is generally limited to their investment in the firm. In other words, creditors cannot acquire the owners' personal assets in the event that the corporation defaults on its debts.

Greater capital access

Corporate structure (and often size) grants the corporation _________ than other forms of business. Due to the ease of transferring ownership and its unlimited life, a corporation can raise funds by selling additional shares of stock (an equity instrument) to investors without disrupting operations. In addition, corporations can issue bonds (a debt instrument) to willing investors. These debt instruments offer corporations an alternative to bank loans for borrowing money.

Equity Financing

Corporations generate ownership finding by selling shares of stock to investors

Financial statements

Corporations report four distinct _______ that address specific types of economic activity

Equity security

Each stock certificate, because it represents a legal claim to a portion of corporate resources

International Accounting Standards Board (IASB)

GAAP currently varies throughout the world, but the trend is towards standardization.

Dual taxation

Governments tax both corporate earnings and the dividends paid by a corporation to its owners.

Single taxation

Governments tax individuals on their business earnings, but they do not directly tax the business income of sole proprietorships and partnerships. The earnings from these businesses flow through to their owners. Consequently, proprietors and partners pay income taxes on business profit as part of their personal income tax liability to federal and state governments.

Debt Financing

In addition to selling shares in the firm to equity investors, corporations also borrow money in order to secure capital

Return on investment

Individuals (shareholder) - Dividend distributions, Capital gains Corporate - Income/Invested Resources

Complex ownership transfers

Owners cannot easily divide the whole of the business into distinct segments or portions for sale. For example, a sole proprietor who takes on another owner must terminate the original sole proprietorship and establish a partnership. Similarly, a partner cannot sell his or her partnership interest in the firm without the consent of the other partners. Therefore, the sale of a sole proprietorship and changing partnership composition are often costly and time-consuming activities.

Internal control systems

Policies and procedures put in place by a company to ensure the integrity of financial and accounting information, meet operational and profitability targets and transmit management policies throughout the organization.

Limited capital access

Sole proprietorships and partnerships are usually small businesses that have relatively few funding options outside of their own savings, gifts or loans from family and friends, or loans from a commercial bank.

Audit Opinions

Standard Unqualified - "clean" opinion Qualified - GAAP departure "except for" Qualified with scope limitation - scope limitation prevents unqualified report Adverse - pervasive departures from GAAP (Going concern) Disclaimer - no opinion

Simple ownership transfers

Stock shares evidence corporate ownership. Shareowners can sell their stock to willing purchasers without altering the structure or operations of the corporation.

Secondary stock market transactions

Stock transactions between independent sellers and buyers

Treasury function

The CFO is also responsible for analysis of financial data. Almost all businesses need to raise capital at some point, and in a large enough organization it is the responsibility of the finance department to not only secure capital for business investments - such as the purchase of buildings and machinery - but to ensure the benefits of these investments outweigh the costs.

Limited life

The business ends with the death of an owner, and the business (or a portion of it in the event of a partnership) becomes part of the deceased's estate. The heirs may continue the essence of the business, but only after paying the necessary estate taxes and creating a new proprietorship or partnership.

Chief Financial Officer (CFO)

The corporate officer in charge of the finance area

Accounting

The financial information system that measures and records the operating, investing and financing activities of the enterprise.

Primary stock market transactions (primary market)

The financial markets refer to the selling of stock to investors through investment banks

Stock certificate

The legal evidence of an ownership stake in a corporation

U.S. Treasury Bills (T-Bills)

There are two primary differences between debt (note and bond) financing and equity (owner) financing

Generally accepted accounting principles (GAAP)

These accounting principles are rules that all U.S. firms must follow when compiling and reporting their financial statements.

Balance Sheet

This document reports an entity's financial position at a single point in time. Assets = Liabilities + Owners' Equity

Statement of Cash Flows

This reports the net increase or decrease in cash over time Sources (uses) of cash from operating activities + Sources (uses) of cash from investing activities + Sources (uses) of cash from financing activities = Net increase (decrease) in cash

Statement of Shareholders' Equity

This statement discloses the changes in the owners' business interest over time. Beginning Balance in Equity Accounts +/- Profit (Loss) +/- Owners' Capital (Dividends) = Ending Balance in Equity Accounts

Income Statement

This statement reports the results of business operations over time Revenues - Expenses = Net Income

Audit Report

Title Addressee Introductory Paragraph Scope Paragraph Opinion Paragraph Name of Audit Firm Date of Report

Voluntary Health and Welfare Organizations

To meet a specifically designated mission

Governmental Entities

To protect & serve the needs of their citizens

Donations or contributions

Voluntary non-reciprocal remittances

Dividend distributions

a corporation may periodically pay cash from profitable operations to equity investors

Governmental (expendable) funds

account for general government and government-related services (e.g. public safety, parks and recreation, and so forth).

Accrual accounting basis

accounting is being used when revenue and expenses are recorded in the period in which they are occur, regardless if then the cash is exchanged. GAAP uses.

Cash Basis Accounting

accounting is being used when revenue and expenses are recorded only when cash is exchanged. GAAP does not use.

Stable dollar

an enterprise does not adjust its financial statements for changes in price levels (i.e., inflation or deflation).

Going concern

an entity will continue operating indefinitely into the future.

Notes payable

are created when banks and other financial institutions lend money to corporations, in much the same way as they loan money to individuals.

Accountants in private practice

are employed by a specific company or nonprofit organization. Classify/record transactions Prepare financial statements Develop budgets Assess performance Measure costs

Money markets

are markets for short-term debt securities.

Expenses

are the costs incurred in generating those revenues

Shareholders (or stockholders or shareowners)

are those individuals and entities that own equity securities (or blocks of stock certificates) in a corporation

Financial asset markets

as opposed to a physical, real, or tangible asset markets because they trade on claims to real or physical assets rather than on the assets themselves.

Financial analysts

assess an array of corporate, industry, and economic data in order to identify and advice their employer or clients on investment opportunities.

Investment banks

assist corporations in raising funds in the financial markets. These specialized financial institutions act as intermediaries in stock sales. They buy stock from corporations seeking funds and then resell that stock to investors

Financial intermediaries

because they facilitate transactions between borrowers and depositors.

Capital markets

bring together corporations seeking funds and individuals and other entities with a surplus of money who are looking for investment opportunities. People refer to this as financial asset markets.

Debt securities

by promising to repay the principal to bond investors, plus the agreed upon interest on the bonds.

Revenues

by selling goods or providing services to customers

Managers

conduct corporate affairs on behalf of the owners.

Expectations gap

difference between the public's perception of the attest function and the auditors' view of the job.

Liabilities

economic obligations to non-owners

Assets

economic resources

Stewardship

encompasses managerial actions that serve owners' interest.

Not-for-profit organizations (NFP)

exist to meet their specifically designated mission.

Form 10K

firm's annual reports.

Securities and Exchange Commission (SEC)

has legal authority to set accounting standards, but it has generally ceded that task to a private organization

Capital gain

if the value of their investment increases over time.

Bonds payable

in that corporations issuing this secure debt financing in the capital markets rather than from financial intermediaries. differ from notes payable

Public placements

involve investment banks selling corporate bonds to willing investors at current market prices.

Corporation

is a legal entity recognized by a state or federal government and with a separate and distinct identity apart from its owners (shareholders).

Fund accounting

is a separate financial and accounting entity within a government organization designed to meet the regulatory and administrative requirements of the organization.

Annuity

is a series of payments made at fixed intervals of time.

Audit

is an opinion expressed by a CPA as to whether a firm's financial statements conform to established accounting principles.

Compound interest

is interest added to the principal of a deposit or loan so that the added interest also earns interest from then on.

Sole proprietorship

is owned by a single individual

Future Value of a Single Sum of Money

is the amount that will be obtained in future if the present single sum of money is invested on a given date at the given rate of interest. The future value is the sum of present value and the compound interest.

Finance

is the area of economics that focuses on the demand for, and the supply of, funds. it concerns itself with the capital requirements that enable a business to operate successfully.

Initial public offering (IPO)

is the first time the newly emergent corporation sells shares of stock to outside investors.

Market capitalization

is the product of its stock market price per share multiplied by the number of outstanding shares of stock.

Future value tables

is the value of an asset at a specific date.

Future Value of an Ordinary Annuity

is the value of its periodic payments each enhanced at a specific rate of interest for given number of periods to reflect the time value of money.

Net income (or profits or earnings)

or the difference between revenues and expenses, equals the wealth created by a business during the reporting period.

Internal accountants (managerial)

oversee the financial reporting system of an organization to ensure that it properly records its economic transactions and discloses appropriate information in its financial statements.

Shareholders' equity

owners' interest in the business

Proprietary (nonexpendable) funds

provide services for fees and are run similar to a for-profit business (e.g., a city providing water to its residents, a country selling electricity to its citizens).

Form 10Q

quarterly reports.

Matching principle

recognize expenses in the period in which they occur regardless of when the cash is paid.

Revenue recognition principle

recognize revenue when earned regardless of when the cash is received. (accounts receivable)

Market price

represents the amount of money that would exchange hands between a willing buyer and a willing seller - in other words, the financial markets' assessment of the current value of the stock.

Governmental Accounting Standards Board (GASB)

sets standards for state and local governments while the Financial Accounting Standards Board (FASB) sets standards for voluntary organizations (as well as for-profit businesses)

Commercial paper

short-term unsecured promissory notes issued by companies

Historical exchange prices (historical costs)

tend to serve as the valuation basis on the financial statements. For example, a corporation that purchased land for $100 per acre in 1980 reports the value of the land at $100 per acre in 2010 despite the fact that it has probably increased in value over the last three decades.

Economic entity assumption

that governs corporate structure and behavior. Unlike a sole proprietorship or partnership, most of the owners of a corporation (stockholders) are not involved its operations

Private placements

the investment bank has preselected buyers for the corporate bonds

Interest rates

the proportion of the loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding

Fiduciary duty

to act in the best interest of the shareholders. This means they must use corporate resources prudently with an eye toward making profits for corporate investors.

Secondary offering (second-step)

to raise additional capital or for other reasons, companies sometimes sell stock later in their existence

Partnership

two or more individuals jointly conduct the business.

International Financial Reporting Standards (IFRS)

will replace U.S. GAAP as the primary American financial reporting authority in the near term. In many instances, however, the IASB and FASB work closely together to improve financial reporting.

Certified public accountants (CPAs)

work for specialized accounting firms that audit large corporation's financial statements Audit services Tax services Consulting services

Business Cycle

•Acquire funds from various sources, such as individuals and banks. •Use those funds to purchase such items as inventory, plant, and equipment. •Employ its resources to sell goods and/or provide services to its customers. •Collect cash from its sales and services. •Use cash collections to pay bills. •Compensate investors for the use of their capital and reinvest any remaining earnings in the business.