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Finance. Lecture 01

This document provides an overview of key financial accounting concepts including GAAP, the four principles of financial accounting, balance sheets, shareholders' equity, and income statements. It explains that GAAP establishes rules for financial reporting, the principles of measurement, revenue and expense recognition, and constraints like materiality and conservatism. It defines the key components of a balance sheet including assets, liabilities, and shareholders' equity. Finally, it outlines that an income statement reports revenues, expenses, and net income.

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Leire Garcia Zabala
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33 views5 pages

Finance. Lecture 01

This document provides an overview of key financial accounting concepts including GAAP, the four principles of financial accounting, balance sheets, shareholders' equity, and income statements. It explains that GAAP establishes rules for financial reporting, the principles of measurement, revenue and expense recognition, and constraints like materiality and conservatism. It defines the key components of a balance sheet including assets, liabilities, and shareholders' equity. Finally, it outlines that an income statement reports revenues, expenses, and net income.

Uploaded by

Leire Garcia Zabala
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Finance WISE 2023

INDEX

GAAP .......................................................................................... ¡Error! Marcador no definido.


FOUR CRUCIAL PRINCIPLES OF FINANCIAL ACCOUNTING ......... ¡Error! Marcador no
definido.
CONSTRAINTS ......................................................................... ¡Error! Marcador no definido.
BALANCE SHEET .................................................................... ¡Error! Marcador no definido.
SHAREHOLDERS´ EQUITY .................................................... ¡Error! Marcador no definido.
INCOME STATEMENT ............................................................. ¡Error! Marcador no definido.

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GAAP (Generally Accepted Accounting Principles)

• Are the rules most companies follow in preparing financial reports.

• Historically developed through common usage.

• Local GAAPs (e.g.: US GAAP, HGB…) differ, but they are detailed, technical and rules
based.

• IFRS (International Financial Reporting Standards), they are characterized as concepts-


based.

• Guidelines are needed to ensure the usefulness of the information so that a firm’s
performance can be compared form period to period to other firm’s performances.

Quality of information and data


Accounting and finance information be useful…to be useful, information must be:

Relevant
Significant enough to influence business decisions & Timely & Useful in predicting the future
Comparable
From year to year for one company & Between similar companies & To industry averages
Reliable
Representational faithfulness & True and verifiable & Unbiased
Consistent
Same rules used each time & Allows meaningful comparison of a company’s performance at
different points in time

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Four crucial principles of Financial Accounting


1. Measurement
2. Historical Cost
3. Revenue Recognition
4. Expense Recognition

I. Measurement and Historical Cost

• The measurement principle determines the amount that will be recorded and reported

• The measurement principle requires that amounts are objective and verifiable.

• An amount is objective if it is based upon independent, unbiased evidence and if it can


be confirmed by a third party.

• Transactions between two independent parties, called arm’s-length transactions, provide


amounts that are objective and verifiable.

• Recording an item at its initial transaction price is called the cost principle or historical
cost principle.

• Under the historical cost principle, amounts do not normally change until another
transaction occurs.

II. Revenues and Expenses


Revenue is the amount earned (received) for providing services or selling goods to your
customers. The revenue recognition principle determines when revenue is recorded in the
accounting records. Normally, revenue is recorded when the services have been performed or
goods are delivered to the customer.

Expenses are the amount used to generate revenue. The expense recognition principle,
sometimes called the matching principle, requires expenses to be recorded in the same period as
the related revenue. Doing so allows the recording of a profit or a loss for the period.

Constraints
• Materiality refers to the size or significance of an item or transaction on the company’s
financial statements.

• An item is material only if it is large or significant enough to influence investor’s


decisions. Only material items must conform to GAAP.

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• Conservatism: When there is any question about how to account for a transaction, the
accountant should select the treatment that will be least likely to overstate income or
overstate assets or to understate liabilities or expenses

Balance Sheet
• Assets: economic resources owned or controlled by the company.

- Current Assets: assets the company plans to turn into cash or uses to generate revenues
in the next fiscal year.
- Noncurrent / Long term / Fixed Assets: assets that will last for more than one year in the
company.
- The structure uses the order of liquidity, how quickly an item can be converted to cash

• Liabilities: amounts that the business owes; claims for creditors.

- Liabilities are obligations the company has incurred to obtain the assets it has acquired.
- Current Liabilities: liabilities the company will settle / pay off in the next fiscal year.
- Noncurrent / Long term Liabilities: liabilities that will take more than one year to settle.

• Owner’s Equity

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Shareholders´ equity
Contributed Capital & Retained Earnings

Contributed capital (paid-in capital): the amount the owners


have put into the business
Retained earnings: capital the company has earned

• Reported on the balance sheet


• Equity is the owner’s claims to the assets of the company

The Income Statement


Revenues & Expenses = Net Income

Revenues: earning of the company


Expenses: costs incurred to generate revenues
Net Income: the amount left after all the expenses are deducted
from all revenues

• The income statement is made up of revenues and expenses.


• Net profit, also known as net income, is the amount left after all the expenses are
deducted from all revenues.

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