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Fa - Session 3

The document discusses key financial concepts including liabilities, assets, financial statements, income statements, balance sheets, and generally accepted accounting principles (GAAP). It notes that GAAP provide standard rules and guidelines for preparing and reporting financial statements to ensure consistency and understandability for statement users. Adherence to GAAP is important as it allows for comparison between companies and consistency over time.

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Haroon Rasheed
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42 views18 pages

Fa - Session 3

The document discusses key financial concepts including liabilities, assets, financial statements, income statements, balance sheets, and generally accepted accounting principles (GAAP). It notes that GAAP provide standard rules and guidelines for preparing and reporting financial statements to ensure consistency and understandability for statement users. Adherence to GAAP is important as it allows for comparison between companies and consistency over time.

Uploaded by

Haroon Rasheed
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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FINANCIAL ACCOUNTING

Session 3
MMS – I
Liabilities
 Liabilities are the present obligations of a
business to pay cash, transfer assets, or
provide services to other entities in the
future.
Assets
 Assets are economic resources owned by
a business that are expected to benefit
future operations.
– Monetary items.
– Nonmonetary physical things.
The Importance of
Financial Statements
 Financial statements are the primary
means of communicating important
accounting information to users.
 Financial statements represent models of
the business enterprise because they
show the business in financial terms.
 Financial statements are not perfect
pictures of the real thing.
The Income Statement
 Summarizes revenues earned expenses
incurred over a period of time.
 Is considered by many to be the most
important financial report because it
shows whether or not a business achieved
its profitability goal of earning an
acceptable income.
The Balance Sheet
 Shows financial position at a point in time.
 Is often called the statement of financial
position.
 Presents a view of the business as the
holder of resources, or assets, that are
equal to the claims against those assets.
Generally Accepted
Accounting Principles (GAAP)
 Focus on understandability of financial
statements.
 Encompass the conventions, rules, and
procedures necessary to define accepted
accounting practice at a particular time.
 Financial statements are prepared by
management and may be biased.
 Financial statements are audited by
independent CPAs.
 An audit ascertains that the financial
statements have been prepared in
accordance with GAAP
Q. Why are GAAP important to readers of
financial statements?
A. GAAP ensure that the financial
statements will be understandable to their
users.
Meaning of GAAP
 . A widely accepted set of rules,
conventions, standards, and procedures
for reporting financial information, as
established by the Financial Accounting
Standards Board.
How it Works

 GAAP principles, which are updated regularly


to reflect the latest accounting
methodologies, are the definitive source of
accounting guidelines that companies rely on
when preparing their financial statements.
The standards are established and
administered by the American Institute of
Certified Public Accountants (AICPA) and the
Financial Accounting Standards Board (FASB).
 GAAP rules and procedures are what
govern corporate accountants when they
present the details of a company's
financial operations. These details can be
found in such places as quarterly balance
sheets or income statements, or annual
reports. Examples of GAAP measures
include net earnings, gross income, and
net cash provided by operating activities.
Why it Matters:

 Investors should always review a company's


GAAP financial results, as the standardized
methodology provides a reliable means of
comparing financial results from industry to
industry and from year to year. However,
GAAP rules are sometimes subject to
different interpretations, and unscrupulous
companies often find a way to bend or
manipulate them to their advantage.
 Furthermore, it is commonplace -- even
for accurate results where GAAP principles
were conservatively applied -- for financial
results to be restated at some point in the
future.
 Often, the most insightful way to compare a
company's performance against prior
periods is to review its non-GAAP financial
measures. Management, analysts, and
investors routinely use these metrics to
gauge a firm's progress. A few widely used
examples of non-GAAP measures include
free cash flow, pro-forma earnings, and
adjusted income from continuing operations.
 Sometimes, certain non-GAAP figures are
common within an industry, and these
tools often prove especially useful when
comparing competitors. Many companies,
for example, often use earnings before
interest, taxes, depreciation, and
amortization (EBITDA) as a core measure
of performance.
 However, non-GAAP financial measures
exclude operating and statistical measures
such as employee counts and ratios
calculated using numbers calculated in
accordance with GAAP.
 The SEC requires companies to reconcile their
non-GAAP financial measures with the closest
comparable GAAP measure. Because they can
vary widely from firm to firm, non-GAAP
calculations do not always provide an apples-
to-apples comparison. For this reason, these
alternative measures are not meant to replace
GAAP, but should instead be used in
conjunction with it.

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